5 moves Yahoo's new CEO should make now

January 6, 2012: 11:40 AM ET

The perpetually struggling Internet giant has a new CEO. Here's what he must do first.

FORTUNE -- When Scott Thompson starts as CEO of Yahoo on Monday, he'll have his work cut out for him.

Once an Internet pioneer, Yahoo's (YHOO) luster has worn off after an epic string of fits and starts, including a parade of unsuccessful CEO -- some of whom have not left quietly -- and a decline in net revenues over the last 12 consecutive quarters. Still, the company currently employs some 13,700 people and attracts some 700 million monthly visitors worldwide.

In Thompson, Yahoo will have a CEO known for being technical and detail-oriented. Those qualities served him well as PayPal president. Under Thompson's guidance, the online payment service became the fastest-growing segment of eBay's (EBAY) overall business and now accounts for 37% of eBay's total revenues. But Thompson is a boss who's never had to deal with a turnaround of the size he now faces. "Every breath he takes will be under such scrutiny by everybody, within Yahoo and from advertisers and Wall Street," says Gartner analyst Allen Weiner. "People are not going to say: Let's give him a couple of months to get started."

Thompson seems to get that. At his first company all-hands meeting, he reportedly told employees the company needs to dedicate a good chunk of resources to new services that might not be profitable in the short-term but benefit the company down the road. And in an interview with The Wall Street Journal, he said his goal was to grow a "really big, high-growth business" in a "relatively short period of time," one with compelling services like PayPal.

Here are 5 moves he needs to make to give the company -- and himself -- a fighting chance.

Drop the underdog act.
Forrester research analyst Shar VanBoskirk believes the company has an image problem, comparing them to the college bowling team that doesn't have a chance of winning: you like them because they're the perpetual underdog, not necessarily because they're doing great things."He [Thompson] needs to stop this impression that Yahoo should be apologized for in some way," she says. Yahoo keeps referring to itself as an "iconic Internet brand," which isn't inaccurate -- it's just not unique. The same thing could be said of other Silicon Valley companies. And though it's a soft intangible, it ultimately affects public perception, portraying the company as one that's constantly looking over its shoulder instead of looking to the future. That in turn at least partly affects the company's ability to draw top talent. If you're an up-and-coming twenty-something engineer hot shot, who do you then want to work for: a cutting-edge brand like Facebook or iconic company like Yahoo?

Sell the Asian assets.
One option Yahoo's board is weighing is the sale of its 40% stake in China's Alibaba Group and 35% stake in Yahoo Japan. There likely would be no love lost over such a deal, given the companies' quarrelsome relationship over the years. (Last year, the two got into a public squabble after Alibaba transferred ownership of the online payment service Alipay over to a new company controlled by CEO Jack Ma.). Such a sale could net the company a reported $17 billion, giving Thompson and Yahoo more capital to play with and cut down on distractions. It would also take one of the most contentious issues for investors off the table.

Use that data.
With 700 million monthly users reading stories on Yahoo, clicking on ads and emailing, the company is sitting on a wealth of data -- it just needs to use it. Thompson acknowledged as much during his first conference call with analysts and in an AdAge interview. "At PayPal, we were able to create an unbelievably compelling business because we used data to understand risk and fraud better than anyone on earth," Thompson told the outlet. "I am more than 100% convinced that there is the same opportunity in the data that is the core of Yahoo's business." Analysts Fortune spoke to agree. Though they're unsure of how the company can best leverage all that data, they believe there's a lot of untapped potential there.

Focus.
In recent years, the company has struggled to answer a basic question: "What is Yahoo?" Responses from top brass have varied over the years, and they haven't necessarily been satisfying to onlookers. At best, it's been described by former CEO Carol Bartz as both a tech and content company. At worst, it's been loosely labeled a global series of Web experiences delivered across a variety of devices that "gives people what they want." The company must refine the answer for outsiders and themselves, as it continues to retire declining services and focus on more promising business segments and new projects.

Work on marketing.
It should also be consistent. One area where Yahoo is losing ground is online advertising: the company's share of the $12 billion display ad market dipped from 14% in 2010 to 13% last year, while its share in U.S. search ads revenues dropped from nearly 11% to 8%. A large part of that may be due to the ever-increasing popularity of Facebook and ubiquity of Google (GOOG) for instance, but VanBoskirk argues the company hasn't done a great job packing up their ad products and explaining them to advertisers. "I've reviewed their marketing collateral and every single piece of collateral describes the products in different ways almost like they're trying too hard to get out a clever story about what they do," she says. "I think it'd be so much better if they said, 'we do x, we do y, and we do z.'"

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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