Internal memo blasts Yahoo

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Is Yahoo suffering from a lack of focus, entrenched bureaucracy and redundancy?

It's a theory that's been aired for some time by investors and Internet industry executives to explain the Sunnyvale Web portal's dimming fortunes against rival Google Inc., among others.

Now Yahoo executive Brad Garlinghouse has acknowledged the problems in a scathing internal memo published by the Wall Street Journal, dubbed the "Peanut Butter Manifesto." In it, he says his company has spread itself too thin and must undergo a major reorganization, including cutting up to 20 percent of its workforce.

Garlinghouse, a senior vice president who oversees Yahoo's e-mail, home page and instant messenger service, circulated the memo to colleagues in October after a disappointing year. Yahoo shares are down 37 percent since January amid slow growth and a delay in a key project to boost online advertising revenue.

At the same time, Yahoo faces stiff competition from Google. In fact, by one important measure -- online advertising revenue -- Mountain View's Google has a commanding lead, according to eMarketer, a research firm, based on estimates for 2006.

Yahoo is expected to generate $3.37 billion in online advertising this year, excluding commissions it pays to partner Web sites. Google will take in $5.5 billion.

Then there's the rise of social networking, where Yahoo has trailed. Internet users have an increasing appetite for sites such as MySpace, which was acquired last year by News Corp. and has since catapulted in popularity.

Yahoo did not address the memo directly Monday, but issued a statement emphasizing progress in a variety of areas, including recent acquisitions and partnerships as well as the positive feedback it's received from customers regarding the introduction of a search engine advertising system, dubbed Project Panama. The system is supposed to make search ads more relevant, an area that Google excels at.

In his memo, Garlinghouse said that Yahoo's problems stem, in part, from trying to do too much, saying his company lacks a cohesive vision, is reactive and is separated into silos that frequently don't talk to each other and fight to protect their turf. "We've known this for years, talk about it incessantly, but do nothing to fundamentally address it," he said.

"I've heard the strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world," Garlinghouse wrote. "The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

He added, "I hate peanut butter."

Yahoo's rise to the most popular Web site has been built on its wide array of offerings, including e-mail, maps and finance. But some areas should be eliminated, according to Garlinghouse, who listed several that he said were duplicative, such as Yahoo's Flickr photo-sharing service and the Yahoo Photos area.

As part of his memo, Garlinghouse said that Yahoo must cut its workforce, currently numbering 11,000, by up to 20 percent. The company, he said, can be more efficient with fewer people who can get more done, more quickly.

Yahoo declined to comment about job cuts.

Ellen Siminoff, a former Yahoo executive who is chief executive of Efficient Frontier, a Mountain View company that helps advertisers manage search engine advertising, said Yahoo is in a period of transition. She said it has done well in one key area, search, but has had the misfortune of being up against Google, which she said has "executed in the 99th percentile" in terms of market share, innovation and generating revenue.

"The reality is that Yahoo has always been challenged by focus," Siminoff said. "There have always been a lot of products at Yahoo and it has always been a complicated business."

Indeed, when chief executive Terry Semel joined Yahoo five years ago, he immediately went about simplifying the structure, which originally had 44 units reporting to him. He eventually whittled the number to four.

Recently, Semel has voiced disappointment with Yahoo's performance, saying during a conference call in October that "we are not exploiting our considerable strengths as well as we should be." He then pointed to several areas the company should focus on.

It's unclear where Semel stands on the specifics in the Garlinghouse memo -- which includes a segment holding mangers more accountable for success -- or whether Garlinghouse has the authority to make any of his ideas happen. In the memo, he said that he hopes merely to "get the discussion going; change is needed and it is needed soon."

Jim Lanzone, chief executive of Ask.com, the Oakland search engine, said that other than the job cuts, the Peanut Butter Manifesto lacks details about how Yahoo would focus its products and business into "one nicely wrapped up strategy."

"Beyond e-mail," he said, "Yahoo has no obvious core."

"One of the reasons Yahoo is the No. 1 site online is that it is spread thinly," Lanzone said. "People use it for very disparate reasons, and that's a blessing and a curse."

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Electronic Voting Machines Could Skew Elections

Cheryl Kagan, a former Maryland Democratic legislator, was shocked when she opened her mail Wednesday morning.

Inside, she discovered three computer discs. With them was an anonymous letter saying the discs contained the secret source code for vote-counting that could be used to alter the votes cast through Maryland's new electronic voting machines.

"My understanding is that with these disks a malicious person could skew the outcome of an election," Kagan said.

Diebold, the company that makes the voting machines, told ABC News, "These discs do not alter the security of the Diebold touch-screen system in any way," because election workers can set their own passwords.

But ABC News has obtained an independent report commissioned by the state of Maryland and conducted by Science Applications International Corporation revealing that the original Diebold factory passwords are still being used on many voting machines.

The SAIC study also shows myriad other security flaws, including administrative over-ride passwords that cannot be changed by local officials but can be used by hackers or those who have seen the discs.

The report further states that one of the high risks to the system comes if operating code discs are lost, stolen or seen by unauthorized parties -- precisely what seems to have occurred with the discs sent to Kagan, who worries that the incident indicates the secret source code is not that difficult to obtain.

"Certainly, just tweaking a few votes in a couple of states could radically change the outcome of our policies for the coming year," she said.

Worry That Elections Could Be Hacked

Computer experts and government officials have voiced serious concerns that if these machines malfunction, no paper record will exist for a recount. Even worse is the fear that an election could be hacked.

Princeton University researchers using an Accuvote TS -- a touch screen version of the Diebold machine -- showed how easy it would be to deploy a virus that would, in seconds, flip the vote of any election.

"We're taking the vote-counting process and we're handing it over to these companies -- and we don't know what happens inside these machines," said Edward Felten, a professor and a researcher at Princeton's Center for Information Technology Policy, which ran the study.

Diebold called the Princeton study "unrealistic and inaccurate."

But many computer scientists, including cyber-security expert Stephen Spoonamore, disagree, pointing out that the Accuvote TS was used in the 2004 presidential election and is still used in at least four states -- including all machines in Georgia and Maryland. Spoonamore said the hack attacked the operating system layer of software and would affect any touch screen machine built by Diebold.

Diebold argues that the software from the 2004 elections has been updated to fix any possible security problems. But Spoonamore is not convinced, saying Diebold's "system is utterly unsecured. The entire cyber-security community is begging them to come back to reality and secure our nation's voting."

There is also the matter of computer glitches. In primary elections and test runs this year, there were glitches with electronic voting machines from Diebold and other companies.

Machines malfunctioned in Texas, where 100,000 votes were added.

In California, directions for voters with vision problems came out in Vietnamese.

And in Maryland, screens froze and memory cards went missing.

Gov. Robert Ehrlich, a Republican running for reelection, advised residents to vote by absentee ballot because he had no confidence in the machines.

"I don't care if we paid half a billion dollars or $1 billion," Ehrlich said. "If it's going to put the election at risk, there's no price tag for a phony election or a fraudulent election."

Many are concerned about how the confusing technical issues will be handled by poll workers, who tend to be senior citizens and who are not necessarily tech-savvy.

Electronic voting machines were supposed to be the solution to the paper ballot problems from the 2000 presidential election. But to many critics, America's voting system has gone out of the frying pan and into the fire.

Copyright © 2006 ABC News Internet Ventures

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2006 Was A Great Year For The Gaming Industry

Every player in the next generation video game console battle is claiming victory after an industry-wide record-setting sales performance in 2006.

A strong holiday season capped off a year that resulted in total revenues of $12.5 billion spent on games, new console systems, handhelds and accessories, according to the industry's market tracker The NPD Group. The 2006 total represents a 19% increase over 2005's $10.5 billion mark, another record.

"Everyone was fairly negative about the industry at the end of last year," says NPD analyst Anita Frazier. "And it started out rocky this year, but within a few months everything started to fall into place. It kind of breaks the conventional wisdom of what a console transition year is like in the industry."

The largest portion, $6.5 billion, went to game software, a slight increase over last year. Revenue from game console systems - including the new Nintendo Wii and Sony PlayStation 3 (both released in November) and Microsoft Xbox 360 - rose 87.5% to $2.9 billion from $1.6 billion last year.

Grabbing most of the attention in 2006 were new game systems - Sony's much-anticipated PlayStation 3 ($499-$599) and the lesser-regarded Nintendo Wii ($249). Consumers bought as many of each system as manufacturers could get to retail and demand drove the resale market on eBay and other online auction sites.

Sony, which earlier this week said that it had shipped 1 million PS3s to North America by year-end, sold 687,300 PS3s, according to the NPD Group's numbers. So far, the PS3 is selling at a faster pace than its predecessors, Sony's Jack Tretton said in a statement.

Meanwhile, the Wii became a hit, too, selling 1.1 million units. "Once you get people to try it, you see them light up," says Nintendo's Perrin Kaplan .

Microsoft's Xbox 360 overcame its own supply problems by spring and sold 3.9 million units, pushing its installed base to 4.5 million - in December outselling PS3 and Wii combined. "The story as we see it is we won the vote with consumers this holiday season, due in part to the quality of our games," says Microsoft's David Hufford.

November's Xbox 360 release Gears of War is expected to surpass the 3 million sold worldwide next week and is tracking to join the industry's top selling games ever, Hufford said. With the third installment in the hit Halo series arriving later this year, "we are really right where we want to be heading in to 2007."

But quietly, two older systems, the five-plus-year-old PlayStation 2 ($129) and two-year-old Nintendo DS handheld ($129) were plugging along successfully, selling 4.7 million and 5.3 million, respectively.

Overall, Sony hardware and games amounted to more than $1.6 billion in December alone - a record month for the industry. " "Not only did consumers drive records for PlayStation 3, they also validated the excellent value represented by PlayStation 2 and the entertainment versatility of PSP (PlayStation Portable, which reached an installed base of 6.7 million )," Tretton said.

Nintendo, Frazier says, "managed to make (the DS) appeal older without abandoning its core customer, the kids" landing New Super Mario Bros. and Brain Age: Train Your Brain in Minutes a Day among the year's top 10 selling games.

At Nintendo, supporters of the Wii and DS feel justified by the results, Kaplan says. "As a risk-taking, innovative company we thought long and hard about bringing these kids of products out. We watched very closely what looked to be happening with players. The glimmer in their eye was not quite as bright (as in the past) and the excitement level was starting to tap out," she says. "Once the Wii and DS were finalized, we all felt like we really shouldn't be doing what we were doing if this didn't have success. It just felt really right."

Leading up to the NPD's release of its annual report, many analysts expressed concern that the performance of the lackluster PS3 could have ramifications for the industry. American Tech Research analyst P.J. McNealy offered that the system did not have many hit titles, might be priced too high and had not been marketed properly as a cost-effective high-definition movie player.

With Sony announcing earlier in the week that it had met its goal of shipping 1 million PS3s to North America and NPD's report suggesting that it had actually sold less than 700,000, McNealy said that "there is headline risk" of doom and gloom media coverage.

Arcadia Investment's John Taylor assessment had a similar tone, too. "The Wii buzz factor completely trumped the PS3," he wrote in a Wednesday report - may contribute to the slowing of the industry's expected PS3 adoption rate.

But Wedbush Morgan Securities' managing director of research Michael Pachter says that "talk of Sony's demise is premature. … Microsoft is growing their lead, but the question now is whether now that we are getting more supply, if we see the PS3 and Wii outsell it on a monthly basis."

Regardless, the situation at the beginning of 2007 appears much more promising than 12 months ago, Frazier says. "There's just a lot of good things going on," she says. "It was just much less volatile going into the transition that expected."

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