As far as I can tell Yahoo! did a lease/sale deal with Microsoft, thereby exiting the growing online search business to focus on the fragmented, super-competitive, online media business because Yahoo! CEO Carol Bartz and her advisors said they could not marshal the capital to fight against the billions in R&D that Microsoft & Google were spending and planning to spend on search. Yahoo!'s mistake is that they want to fight the last war - traditional search, and traditional "portal" control. It is with this perspective that they "jumped the shark" and lost any hope of regaining their greatness.
What the Yahoo! Executives missed is that the hottest part of the internet - the social web - takes tiny amounts of capital and it is garnering a lion's share of the incremental growth in attention and therefore would be hugely beneficial to any advertising driven company like Yahoo! As my venture capital friends lamented to me once, it took practically no capital to launch Linked-In, Twitter, and even the early days of Facebook. This growth in the social web is here to stay. I find the most interesting way to think about it comes from my friend, and Diamond Fellow, David Reed of the MIT Media Lab. He says we now have "the third cloud" (his May presentation is here). The first cloud was connection to the internet; the second cloud was resources like Yahoo! and Google. The third cloud is social connection. Twitter, Linked-In, and Facebook are all examples of services that comprise the social cloud. We know from the history of technology that social functions always top mechanical ones. Alexander Graham Bell expected his phone to be used to broadcast symphonies (remember the phone came before the radio), yet simple "talking" won the day. On cell phones, it is talking and text messages that are the bulk of all revenues. With computers, the killer application has always been email - which was vibrant long before spreadsheets. In large part, social computing is computing, and everything else hangs off the social aspect.
So, I think it's a shame that Yahoo! decided to sell out at the very time when Google and Microsoft are both vulnerable to a company that can harness the social web in a way to garner even more eyeballs and involvement. How could Yahoo! have done it without spending billions? They could have gone back to their roots. Many years ago when I was teaching at Harvard Business School, Tim Brady was a student of mine and he did the early marketing plan for Yahoo! as part of our course on "Managing in the Marketspace" - back in the spring of 1994. Tim had been a Stanford roommate of the two Yahoo! founders Filo and Yang. Yahoo! was created as the best aggregator of useful content.
Today, there is a need for some high-traffic firm to act as a sophisticated aggregator of social content. One outstanding example of this type of aggregator is a little firm called Xobni (which I have written about before). Xobni is a simple add-in to your Microsoft Outlook, which does many things including linking to people's Linked-In and Facebook profiles - all from within Outlook. This is a new fangled version of exactly what Yahoo! did at the birth of the Web, but this time it is about social information and it links intimately with the way people already work. I don't know the statistics, but my bet is that corporate users spend more time within Outlook, than any other application - including Facebook. Even if Yahoo! could not do the Xobni deal, it would not take billions to create a competitor, and Bartz's reason for exiting the search business was simply wrong headed.
Every company can benefit from aggregating social information about their target market or their product/service category. My colleague Chris Curran started up the CIO Dashboard, in which he chronicles all the CIOs who use Twitter, and offers his own sage advice on CIO issues. He has garnered over 1,200 followers in less than a month, and his share of voice is growing rapidly. Any company can do this if they are thoughtful about who they want to talk to and what the natural, emergent social cloud already exists. Remember, social always trumps anything else - so just follow the people.