Yahoo Open Strategy could be its salvation

As its stock price plummets, Yahoo's executives must do something tangible and do it quickly to prove to shareholders that fighting a takeover bid by Microsoft was the right thing to do, analysts said this week.

One area where industry observers see hope for Yahoo is in its ambitious plan to use the success of social networking in an initiative called Yahoo Open Strategy. Under the plan, Yahoo will open all its sites, online services and Web applications to outside developers, and give users a "social profile" dashboard to unify and manage their Yahoo services.

Meanwhile, as expected, Yahoo's shares closed down 15 percent to US$24.37 on the first day of trading after Microsoft pulled its offer to acquire the company for $33 a share, or about US$5 billion more than its original offer. Yahoo turned down the offer, saying it undervalued the company, and wanted $37 a share.

Among other moves that Yahoo could be taking to increase the company's value is a reported deal in which Yahoo would outsource its search advertising to Google Inc. However, a deal between Yahoo and Google would raise antitrust questions because of Google's dominance in the search market.

Another possibility is some kind of deal involving AOL. At one point, Yahoo was reportedly in talks with Time Warner Inc. to combine its Internet operations with AOL. Time Warner was also to make a cash investment in exchange for 20 percent of the company.

But the scenario that appealed to some industry observers is Yahoo's Open Strategy initiative, which it started forming last year and was launched internally in September. If Yahoo is able to move ahead with the strategy, it could pose a major threat to the appeal of MySpace, Facebook and other social networks, and give Yahoo the boost it has been seeking for years among Web users, according to analysts.

Karsten Weide, an analyst at IDC, said Yahoo's Open Strategy has exciting potential. "I wouldn't have used the word 'exciting' with the name Yahoo for a long time, but those are actually quite exciting initiatives," he said.

Weide said Yahoo Open Strategy would open up Yahoo as a platform to external developers, similar to what Facebook has done.

"With Yahoo OS, the company unveiled both its new long-term strategy and that strategy's most important component," Weide said. "The hope is that [the strategy] will combine to increase audience reach, traffic, advertising inventory and, consequently, advertising revenue growth," he said.

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Yahoo Open Strategy could also help make the company a viable competitor to Google, and could help save Yahoo. "Essentially, Yahoo OS could turn Yahoo into one giant social networking service, but one, as opposed to services such as MySpace and Facebook, that actually delivers on what a social network service is supposed to do: facilitate social relations, automatically keep track of connections, allow for any sort of communication, allow collaboration," Weide said in a research brief.

Weide said Yahoo's Open Strategy would attract more users and would be more likely to retain them. The users themselves would spend more time on the service and would also generate more page views. It could also leverage data on users' social relations and their online behavior to better target ads, promising a better return on investment for advertisers' marketing dollars, he said.

Dana Gardner, an analyst at Gilford, N.H.-based Interarbor Solutions, said Yahoo needs to improve the depths of its relationships with its end users. And that means getting more metadata about who they are, what they do and what they like, he said.

"The way they're going to do that is, they're going to embrace the social networking functions much more deeply and in a sense try to take what MySpace and Facebook and LinkedIn and those types of organizations do and make that part of the whole Yahoo experience," he said. "So instead of going to a separate site to do networking, you can do your social networking while you're doing whatever else you're doing on Yahoo."

He said Yahoo has to become a life-style site where users spend a lot of time and create lots of page views so the company can take that information back and sell it to the advertising community in a way that Microsoft cannot. And that's something the Open Strategy initiative could accomplish.

However, Allen Weiner, an analyst at Gartner, said that although Yahoo's Open Strategy is more definitive than other plans, he's not sure it will resonate beyond analysts and other close watchers of the market.

Charlene Li, an analyst at Forrester Research Inc. in Cambridge, Mass., in a blog post, also said that Yahoo's new Open Strategy could position the company to bring users back into the fold.

Information from the IDG News Service was included in this report.