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Yahoo's identity crisis is nothing new. And under the reign of the company's current CEO, Carol Bartz, Yahoo's identity crisis has arguably turned into an identity tragedy.

Nothing reflects that better than Yahoo's newfound 'product development' strategy: outsource everything to third parties, some of which were previously competitors. Recently, Yahoo outsourced Yahoo Personals to online personals competitor Match.com, and yesterday it was announced that Yahoo is outsourcing a good chunk of Yahoo Real Estate to real estate competitor Zillow.

When the Match.com deal was announced, Susan Mernit, who used to head up product at Yahoo Personals, commented:

It is a great idea if you believe Yahoo! should focus on a small set of core businesses and divest of things that are distractions (though, 2 1/2 years out of Yahoo! I have no idea what those core business area).

And it is a great idea if Yahoo's best plan is to be an aggregator and make $3-4 MM a year in affiliate referrals via partner payouts for customer acquisition rather than manage greater revenue against greater cost.

She concluded by stating "Yahoo! stopped having great ideas a long time ago."

Her strong criticism of the deal raises an important question: is Yahoo really building a stronger company by outsourcing 'non-core' businesses (eg. vertical properties) to third parties? In answering that, I think Google's recent acquisition of ITA is somewhat instructive. In buying ITA, Google clearly considered the possibility of 'outsourcing', but explained why it didn't:

We think we can make more significant innovations and bigger breakthroughs in online flight search by combining our engineering expertise with ITA Software's than we would by simply licensing ITA Software's data service.

In other words, Google believes that to succeed in the travel vertical, it had to bring the best technology it could buy in-house. Yahoo's continued outsourcing, on the other hand, seems to reflect a belief that the company can do better by letting others manage its vertical properties.

While it would be naive to believe that Yahoo can compete in every vertical in which it currently has a presence, Yahoo's approach indicates that the company is no longer prepared to compete on its own in lucrative verticals that are important to its business. There are numerous downsides to this. For instance, it will be virtually impossible for Yahoo to maintain a cohesive, consistent user experiences across its vertical properties as more and more of them are outsourced to third parties, it will be difficult logistically for Yahoo to maximize the results. After all, partnerships may ease some burdens for Yahoo, but they won't manage themselves.

In short, while there often is a good case for 'outsourcing' in certain circumstances, Yahoo's outsourcing is really the result of an unwillingness to invest in building up (or revitalizing) vertical properties that can be meaningful contributors to the company's success. That unwillingness to invest in itself will not strengthen Yahoo; it will only make it weaker. Unfortunately, it looks like Yahoo is going to have to learn that the hard way.

Patricio Robles

Published 9 July, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Comments (5)

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SEO Agency

Great article. I think Yahoo! may go the outsourcing route once the search engine has fully merged with Microsoft's Bing engine. I think that they are watching and learning from Google errors, but we await with interest!

over 6 years ago

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Fabrice Burtin

Yahoo! Is still a desired brand. It has still strong brand equity and is credible. But for how long. They are following the same path as hotmail and msn with an unclear business strategy. In a similar way, Yahoo was at the forefront of the Internet in the late 90's. They were so advanced and had such a competitive advantage that they went for everything and nothing just because they could. They had no competitors. They could afford to try anything and fail. They were Yahoo! But the competitive landscape has changed........ Today they are ONLY Yahoo! You can only be the best if you are the best at what you do. Diversification and outsourcing to third parties is NOT the way forward for excellence. Yahoo! Should rationalize it's product line and start allover again from scratch and be the best at what they do. One by one. There is more value at being excellent at a few things than to be average at a thousands things. But can they financially afford it? Neverthteless Yahoo is an interesting case study to follow over the next four years.

over 6 years ago

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Cyberduck

Yahoo should invest and focus on its search, directory, mail and purchase smaller technology companies like Google does. It may make sense for them to outsource things like the property, providing that it can be branded 'Yahoo'.

over 6 years ago

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Ajeva

Funny that people outsource almost anything ( they hate doing ) these days. I think people and businesses are finding ways to have better sleep at nights by outsourcing their problems to cheaper service providers out there. Welcome to the age of virtual immigration - where you don't have to cross borders to simply work for someone else. Your post is interesting, though. I'd love to see who will go down first: Yahoo or Google? Who knows? Maybe something new will rise up and challenge everything, like cloud computing did.

over 6 years ago

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Allshore

I think it is because Yahoo Is focused on multi business, they are not targeting a specific business. Like google is targeting search engine business.

almost 6 years ago

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