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Yahoo CEO: Active Talks Going on With Alibaba Over Alipay

Yahoo CEO Carol Bartz and co-founder Jerry Yang opened the company's investor meeting on Wednesday addressing head on the company's tussle with Alibaba Group over the latter's decision to spin off its online payment unit Alipay.

Yahoo, which has said it wasn't informed about the spin-off, is now actively engaged in discussions with Alibaba Group to make sure Yahoo is "properly compensated" for the divestiture, Bartz said.

However, Yang and Bartz said that all parties have agreed not to discuss the details of the ongoing conversations. "We believe we're making significant progress," she said.

The situation is very complex due to an uncertain and unclear regulatory climate in China regarding online payment companies like Alipay, Yang said.

Also adding to the complexity is the involvement of a number of companies, executives and investors, including Yahoo and Softbank, he said.

Alipay doesn't yet have its license from the Chinese government, and Yahoo and other Alibaba Group investors recognize that it's important for that to happen for the benefit of all involved, they said.

In addition, the Alipay value as a standalone operation is currently small, but its value is higher in conjunction with Alibaba Group's Taobao e-commerce site, they said.

"We're working very hard to protect your interests," Bartz told investors. Yahoo holds a 43 percent stake in Alibaba Group worth US$2.32 billion as of March 31, 2011. Yahoo bought the stake for $1 billion in 2005, when it transferred management of its brand and services in China to Alibaba Group.

Earlier this month, Yahoo accused Alibaba Group of spinning off Alipay to a Chinese company controlled by Alibaba CEO Jack Ma without Yahoo's knowledge.

Alibaba, however, contested Yahoo's portrayal of the situation, saying that Yahoo's board members were well aware that for Alipay to obtain a license, it needed to be spun off.

Eventually, the companies issued a joint statement saying they were working to draft a solution to the issue. It's not the first time that Alibaba and Yahoo locked horns during Bartz's tenure. Last year, Alibaba blasted Yahoo for supporting Google after Google disclosed it had been hacked from within China.

The Alipay controversy isn't the only one on the table for Bartz as investors convene for this meeting. At the company's first-quarter earnings call in April, Bartz acknowledged that the search partnership she brokered with Microsoft isn't yielding the expected revenue for Yahoo so far.

On Wednesday, she reiterated the concern and her belief that Microsoft will fix it by year's end. She also noted that the deal guarantees a fixed level of revenue for Yahoo through March of next year, so the company is protected until then from the softer revenue coming in.

When the deal was signed, Yahoo estimated that, when fully implemented, it would boost its annual operating income by about $500 million, provide capital expenditure savings of about $200 million and increase annual operating cash flow by about $275 million.

The deal also calls for Yahoo to be in charge of selling premium, guaranteed-placement search ads on behalf of both companies, and to handle the one-on-one relationships with the biggest advertisers, search marketing firms, resellers and their clients.

As she and other officials have repeatedly said since the deal was signed, Bartz again said that the partnership with Microsoft allows Yahoo to focus on improving the front-end search experience, which is where she believes the company can provide differentiation in the market.

The common goal for Yahoo and Microsoft is to compete better against Google, which holds a dominant position in the global search market both in usage and ad revenue.

Leading Yahoo hasn't been an easy task for Bartz since she took over the CEO job in January 2009 from co-founder Jerry Yang. In addition to dealing with the Yahoo internal problems she inherited, she had to face a shrinking online advertising market as a result of the global economic crisis.

Shortly after becoming CEO, she approved a round of layoffs and shook up the company's corporate structure after finding it wasn't conducive to quick and effective decision-making.

She also presided over a revamping of the company's technology back end, designed to bring global consistency and increase the efficacy of the systems that power Yahoo's content management and advertising platforms.

Internally, Yahoo calls the new content management and publishing system "Lego" because it's modular and can be adapted with great flexibility, letting editors act quickly.

It also provides a lot more content personalization than its predecessor, letting Yahoo serve up millions of different versions of its home page every day around the world, she said. This has led to increased traffic and user engagement.

"When you give personalized data to consumers, they react," Bartz said.

Yahoo is also working hard to be a leading digital media provider in all platforms, including desktop computers, cell phones, smartphones, tablet devices and connected TV sets, she said.

Yahoo has now almost completed the transition to a new display ad system called APT in the U.S. and will roll it out internationally later, she said.

Bartz has been criticized for what some perceive as a talent drain at Yahoo. However, she has also drawn talented executives, like Chief Product Officer Blake Irving and Ross Levinsohn, who last year became executive vice president for the Americas region.

Bartz also has led a charge to streamline and consolidate Yahoo's product roster, shutting down or selling many services and units, including Zimbra and Delicious, in order to focus on core offerings like Yahoo Mail and Messenger, Yahoo Finance and Yahoo Sports.

Most notably, she struck the controversial deal in mid-2009 to partner with Microsoft in search. During the first five years of the 10-year deal, Yahoo agreed to give Microsoft a 12 percent commission on paid clicks on Yahoo and Yahoo-partner sites. In exchange, Microsoft agreed to take over back-end search functions for Yahoo, including Web crawling, indexing and ranking.

Since she took over, Yahoo hasn't produced an innovative, blockbuster new service, resorting mostly to integrating its products with popular sites like Facebook and duplicating popular trends.

However, with Irving on board, Yahoo is trying to come up with innovative products as well. Earlier this year, it announced the "digital newstand" Livestand for tablet devices and cell phones.

While the rounds of layoffs under Bartz have attracted much attention, the company had 13,300 employees at the end of 2011's first quarter, just 300 fewer than at the end of 2008.

Company shares, which closed at $12.10 per share on Jan. 13, 2009, her first day as CEO, stood at $16.14 at yesterday's closing.

In her first quarter on board, 2009's first quarter, Yahoo had revenue of $1.58 billion, down 13 percent year on year, while GAAP net income fell 78 percent to $118 million.

By comparison, in the first quarter of 2011, Yahoo had revenue of $1.21 billion, down 24 percent year on year, while net income fell 28 percent to $223 million.

On Wednesday, Bartz said the accomplishments her team has delivered at the technology and business levels are significant, and argued that Yahoo has been saved from the downward spiral it was in when she took over as CEO.

"It's somewhat very popular to say Yahoo isn't turning around," she said.

"This team focuses on revenue, on performance with a passion," she added. "Give us some credit for turning this company around."

While she has done a much better job than her predecessor Yang, Bartz has room to improve, an industry analyst said before the meeting.

"Yahoo's performance under her leadership has been mixed," said industry analyst Greg Sterling from Sterling Market Intelligence, in an interview.

Sterling gives Bartz credit for streamlining and rationalizing the company's organization structure. "She's cleaned things up quite a bit," he said.

Under Bartz, Yahoo has also maintained its leadership position as one of the most popular providers of content and online communications in the world, he said.

However, the search deal with Microsoft isn't paying the expected dividends and the level of product innovation in the company could be higher, Sterling said. Specifically, Yahoo seems to have lost some of the edge it had a year or two ago in mobile, he said.

"What she's been able to do is clean up some of the management challenges, she's maintained Yahoo's position, but she hasn't really moved the company forward in a significant way," Sterling said.

"The company is smaller and has been streamlined but it doesn't seem to be faster," he added.

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