Major challenges for new CEO of Yahoo

As one of the Web's most popular sites, Yahoo should be in its prime. It enjoys huge traffic and makes money -- no small feat in this economy.

Despite those facts, the Web portal is financially bruised, and its slumping stock reflects that.

Getting Yahoo back on track will be front and center for the company's next leader after Monday's announcement that CEO Jerry Yang plans to resign. His successor will have to make some big decisions: engineer a major makeover or try to restart takeover talks with Microsoft Corp.

The outcome promises a new chapter for 14-year-old Yahoo, one of the Internet industry's pioneering companies. By all accounts, doing nothing would mean a slow decline into obscurity, much like what happened to the Web's early giants, AOL, AltaVista and Lycos.

"They would have to make some very, very substantial changes to the organization to regain the market share that they've lost over a short period of time," said John Poerink, managing partner for Linley Capital, a private-equity firm in New York.

Yahoo is suffering from a succession of problems, including losing ground to rival Google. Whereas Google's share of the lucrative U.S. search market has grown over the years to 59.7 percent, Yahoo's has shrunk to 18.1 percent, according to Nielsen Online.

"Google is on its way to controlling nearly 100 percent of the market over time," said Heath Terry, an analyst for Friedman, Billings, Ramsey & Co. "Yahoo is going to be on the losing end of that."

Yahoo's strength in display advertising, the equivalent of online billboards, is waning, he added. Growth in consumer traffic on its properties is shifting from categories that generate some of the biggest returns -- automotive, health and entertainment, for instance -- to lower-priced areas like e-mail and photos, he said.

Mike Kwatinetz, a venture capitalist with Azure Capital Partners in San Francisco, said that Yahoo isn't doing poorly, given that it is the No. 2 U.S. Web property behind Google, and that it remains profitable. But he said it is failing in the eyes of investors in the all-important game of expectations.

"Expectations for a company in that space are set by Google these days, and by that measure, Yahoo hasn't looked good," Kwatinetz said.

For Yahoo to improve its viability as an independent company, Kwatinetz recommended that its new CEO expand in emerging areas where there are no clear leaders, such as online video advertising, while trying to squeeze out more money from properties that it already owns, such as the Flickr photo-sharing service, as long as users don't protest.

Acquisitions could give the company a head start in other niches where people spend a lot time online, he said.

Analysts put high odds on Microsoft returning to the negotiating table to buy Yahoo, after Yang's successor is in place. Many believe that Yang was an obstacle to a deal earlier this year and that his replacement will be more willing.

E-mail Verne Kopytoff at vkopytoff(at)sfchronicle.com. For more stories visit scrippsnews.com