Technology

86 | GlobeAsia December 2015

Yahoo is going through an identity crisis. First it announced plans to spin off its stake in Alibaba. This was understandable

given the lack of synergy between the two. In November however, Yahoo announced a deal with Google that would see Google search and ad technology powering Yahoo’s search results. The Google deal is exclusive and in addition to an existing arrangement Yahoo has with Bing.

With the exception of areas it considers high growth - CEO Marissa Mayer’s “Mavens” (mobile,

video, native and social advertising) - Yahoo appears eager to offload responsibility for every other part of its business to other players. Yahoo’s decisions over the next few months will make or break the company and investors are antsy.

Is Yahoo a search engine?Some context is necessary. In the 1990s, most considered Yahoo a horizontal portal. Most portals included a search engine, but they also included all sorts of content and ways to find that

Why Yahoo’s identity crisis could finish it off

December 2015 GlobeAsia | 87

will be to compete with Google. Yahoo is ugly. Clutter has always

been a huge problem for Yahoo going back all the way to the Inktomi days. Because it defined itself as a web portal early on, Yahoo’s homepage has always been littered with graphics and visual distractions, in stark contrast to Google.

Unlike Bing or Google. Yahoo doesn’t have a deep-pocketed parent company it can rely on to promote its other properties. Yahoo is forced to put text links to most of its member sites at the top of every search result. The overall cluttered and text-heavy appearance is rather unappealing. Basch says Google’s minimalist style won out over Inktomi’s clients, one of whom was of course Yahoo. Yahoo apparently didn’t get the memo.

Yahoo’s focus on Mavens To be fair, Yahoo’s Mavens’ revenue is the fastest-growing in its portfolio, up 43% to $422 million from the third quarter last year. It may be tempting to look at what works and do more of it. Yahoo has clearly learned that the search business is a low-growth sector but it still represents a lion share of its revenues. It’s difficult not to think of the company as a search engine first when search revenues are at $870 million.

Ultimately those search visitors drive users to Yahoo’s Mavens and so it’s about time Yahoo steps up its R&D. In a Securities and Exchange Commission filing back in 2013 Yahoo admitted that a good 31% of its revenue came from its search deal with Bing. This number was significantly in excess of their previously provided ballpark figure of “more than 10%.”

Is it wise then to offload such a crucial part of one’s business to companies that would otherwise be competitors? There is a quote floating around on the internet from former

Jason FernandesTech commentator and the founder of SmartKlock.

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directly with Yahoo or any of its competitors.

Yahoo’s deal with Bing and Google today is very different because these companies each have their own search engine competing directly with Yahoo for market share. Inktomi met an ignominious end in 2002 when it was acquired by Yahoo for a trifling $250 million. One of Inktomi’s early employees Diego Basch, wrote a lengthy blog post a few years ago explaining why Inktomi failed. The blog lists a litany of reasons but a few stand out because of their relevance to Yahoo’s situation today.

Speed and poor design killed InktomiYahoo is slow. According to web stat agency Alexa. “63% of the sites are faster.” This is atrocious if Yahoo’s goal is to be peoples start-page. The rating refers to the homepage and not Yahoo’s search results but Yahoo is bound to have speed issues with its results page. As Basch says in his post, since Inktomi merely powered search engines, they had little control over the design of those websites or speed with which they rendered.

While not naming Yahoo specifically, Basch says that for personal use, Inktomi employees often chose Google over Inktomi clients (one of whom was Yahoo) for their search needs simply due to speed and simplicity.

Since other search engines had to query Inktomi’s servers for results they could never compete with Google on speed, and the same is likely true for Yahoo. Yahoo will be juggling between using its own algorithms, Bing and Google’s for its results. Yahoo will have to communicate with either Bing or Google servers before returning results, doubtlessly delaying things.

Common sense dictates that the more Yahoo has to do between the request and the results, the harder it

content along with free email accounts in some cases. It’s worth remembering a time when it was rare for search engines to actually have their own algorithms. With the exception of Ask.com (then called AskJeeves.com) many search engines instead contracted offsite for their search functionality.

Inktomi, with a market cap of $25 billion at the time, was one such early partner of Yahoo, powering its search engine. The company had one of the most robust and reliable search algorithms of its time but - most importantly - Inktomi did not compete

Yahoo’s decisions over the next few months will make or break the company and investors are antsy.

Technology

88 | GlobeAsia November 2015

Starboard Value LP has publicly called for Yahoo to abandon its planned spinoff of Alibaba and sell its core internet business instead! So analysts are concerned about a possible (if unlikely) nightmare scenario where Yahoo’s tax liability for the sale of Alibaba could usurp 100% or more of its potential gains. Without clarity from the government on the possible tax implications, they view this as an unacceptable level of risk.

Yahoo should focus on Mavens and searchSpinning off Yahoo’s core business is a terrible idea if for no other reason than because its apparently worth very little, according to Wall Street. Yahoo’s stake in Alibaba is worth $30.7 billion today. Based on Yahoo’s current stock, its valuation stands at 31.2$ billion, leaving its ‘core’ business valued at about $600 million - little less than half the $1.3 billion cash on hand (a situation HTC recently found itself in).

When a company is valued at less than half the cash it has on hand some soul-searching is in order, but getting rid of Alibaba in one go and hoping that the tax implications aren’t severe is not a strategy. Conversely, Barron’s criticism is not the last word. Their story was controversial and outlets like Business Insider and CNBC took issue with the report, citing factual inaccuracies.

Whatever the truth, selling their stake in one go in the absence of government clarification on the tax bill is a terrible idea. Yahoo should slow down its divestment plan so as to minimize its tax liability. That would both mollify investors and allow Alibaba to prop up its numbers for the next several quarters.

If Yahoo is so keen to divest itself of anything it should get rid of Tumblr, the $1.1 billion former acquisition-turned-albatross and use the funding windfall for R&D in the mobile space. Mayer has correctly identified Mavens as a high-growth area but Yahoo ignores desktop search at its peril. Mobile users are looking for synergy between desktop and mobile products and inconsistency in focus from Yahoo will be apparent

It’s ironic that a company that defined the search industry for the 1990s is so lost today, like an overgrown awkward teenager desperate to find themselves. Author Jarod Kintz wrote: “I Google myself to find out who I am as a person.” For Yahoo, who’s search results will soon be served up by Google, this will soon be quite literal. One can only hope that Alibaba or at least Google can help Yahoo find itself.

Inktomi COO Dick Pierce dismissing the loss of Yahoo’s contract, explaining that since Yahoo represented less than 2% of Inktomi revenues, Yahoo’s decision to move to Google’s search engine technology would have “little impact with respect to profitability.”

Maybe, and Siberia is a “little” chilly this time of the year. Knowing how things turned out for Inktomi, Yahoo’s dependence on Bing (and now Google) should be troubling. Still regulatory hurdles are expected to crop up for this deal, most notably in India and the European Union. This deal is far from done but the real government problem for Yahoo could be taxes from its divestment of Alibaba.

Alibaba: no ace in the hole Yahoo’s effective subcontracting of its desktop search business and betting instead on Mavens, and even its $1.1 billion acquisition of Tumblr would not be so risky if Yahoo’s stake in Alibaba was on firmer ground. When Yahoo first began offloading its stake in Alibaba, the Chinese company was riding high and had a massive valuation.

In September however, Barron’s wrote a scathing critique blasting Alibaba for what it said was a lack of clarity in its accounting and predicting the stock could fall 50%. These ‘accounting concerns’ coupled with worries that Alibaba’s perceived laissez-faire attitude towards counterfeiting would invite regulatory scrutiny has short-selling specialist Jim Chanos pitching Alibaba as a short. Despite a strong Singles Day sale for the company investors continue to remain largely unimpressed.

To complicate things, Yahoo Investor

Analysts are concerned about a possible (if unlikely) nightmare scenario where Yahoo’s tax liability for the sale of Alibaba could usurp 100% or more of its potential gains.

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Book Review104 Reinventing Indonesia: Two decades of democratizationThe broad sequence of events that led to the fall of President Suharto and the rise of democracy in Indonesia are well known. But few of us know the details of that period like former Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmitra and former Harvard faculty member Joseph J. Stern.

living the goodlife112 The spirit of PenfoldsPenfolds, one of Australia’s oldest and most iconic wineries, has been on a roll lately and continues its unabashed headway into Southeast Asia’s largest economy.

Back Page116 Whiteaway, Laidlaw & Co. Department Store

Columnists16 Steve Hanke Bank regulations continue to hinder the US recovery

82 Jamil Maidan FloresRuling the waves in the South China Sea

86 Jason Fernandes Yahoo’s identity crisis could spell disaster

96 Keith Loveard Swimming like a fish ... again

98 Scott YoungerDevelopment reality and

contents

Special Report 78 Conquering the airwaves When President Joko Widodo announced his work program to his cabinet ministers in November 2014, one of the priorities was to develop the eastern part of Indonesia. For Communications and Informatics Minister Rudiantara that meant building telecommunications infrastructure connecting the eastern part of Indonesia with the rest of the archipelago.

Indonesia Economic Forum90 A historic opportunity for IndonesiaThe rise of the digital economy and acceleration of infrastructure development were the key themes at this year’s Indonesia Economic Forum (IEF). With speakers from the region and around the world, the IEF provided an ideal platform for business leaders, policymakers and investors to gather to discuss both the opportunities as well as the challenges that confront the nation.

Interview100 Liquid timeWhen HYT launched its revolutionary liquid-engineered H1 timepiece in 2012, it took the watch industry by storm. Since then, the company has produced a number of cutting-edge watches with the latest H4 series incorporating a light system that is powered by clean energy.

VOLUME 9 NUMBER 12 / DECEMBER 2015

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8 | GlobeAsia December 2015

Who holds power in today’s Indonesia? It is a straight-forward question but the

answer is complex. Democracy, economic growth and political fracturing mean that there is no single center of power but multiple sources.

In the past, the military and the presidency were the main sources of power. Today, however, businesses, political parties, non-government groups, the police, military and the media all jostle and compete for influence.

Power is shifting from a small group of political players to a wider constituency. It is shared between the center and the regions as every senior government official is elected. So ultimately, it can be argued, it is the people who hold ultimate power in the country.

This shift in power has occurred over the past 18 years as democracy has taken hold. But it has been cemented over the past decade with the rise of the middle class as more and more Indonesians have joined the consuming class. Numbering 50 million today, the middle class is a growing force on the country’s landscape.

With swelling numbers and a bigger stake in the economy, the middle class will exert both power and influence on a broader scale. They will demand better quality public services and, more importantly, they will not be afraid to voice their displeasure.

Businesses, politicians and other

civil servants will have to adapt to this new landscape. Spending power will determine the fate of the country and political rights once gained will be hard to remove.

So the new Indonesia is more complex but also more stable. Without a dominant force, political power will ebb and flow between the competing factions but ultimately, they will all have to bend to the public will.

The recent haze disaster provides a wonderful illustration of how the new diffused power is affecting politics in Indonesia. As public discontent began to rise and as stories of babies dying due to the choking smoke began to appear in the mass media, the government was forced to take firmer action and even apologize for not doing enough to manage the yearly cycle of burning.

President Joko Widodo cut short his trip to the United States to return home to handle the growing crisis. It would have been unthinkable just a few short years ago for the president to cut short such an important diplomatic mission to rush home in such a manner.

The rise of the middle class will have a direct and lasting impact on the political and economic constellation of the country. In most part, that is a good thing.

Shoeb KagdaEditor in Chief

shoeb@globeasia.com

Editor’s Note

EditorialEditor in ChiefShoeb Kagda

Managing Editor Yanto Soegiarto

Editor at LargeJohn Riady

Senior EditorAlbert W. Nonto

Contributing EditorsSteve HankeScott Younger

ContributorsFrans WinartaJason Fernandes

Special ColumnistJamil Maidan Flores

ReportersVanesha ManuturiDion Bisara Art, Design and LayoutGimbar MaulanaElsid ArendraRudi PandjaitanAgustinus W. Triwibowo

Senior PhotographersM. DefrizalSuhadi

ProductionAssistantDanang Kurniadi

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