Yang betting on Y!Open to save Yahoo!

In a memo to Yahoo employees, co-founder and CEO Jerry Yang asked his troops to redouble their efforts and to focus on executing what he called the most important transition in the company's history. It was the expected post-game motivational speech after declining to take Microsoft $33 per share offer.

On Monday Yang, will face some irate investors and employees. The stock is expected to head south at the market open. He will need to provide more evidence than slideware about doubling operating cash flow in three years that Yahoo has a plan to grow revenue and profits ahead of competitors.

In the note, Yang mentioned the exclamation point in Yahoo's name (we leave off the "!" in references to Yahoo!) and looking forward to the future:

there's a reason why we're the only fortune 500 company with an exclamation point at the end of our name, and now is the time to demonstrate what that exclamation point stands for.

I am intrigued by the rendezvous of the most important transition in company history and the exclamation point. Yang appears to acknowledge that Yahoo hasn't fully earned an exclamation point after its name, and his memo wasn't explicit on what the most important transition entailed.

What would it take for Yahoo to reach its manifest destiny, to put the exclamation point in bold, and get rid of the "struggling" label on its forehead? It's not going to come from selling search ads. Google is lapping Yahoo, and Microsoft is highly motivated to reinvigorate its efforts sans Yahoo.

Yahoo and Google are talking about a deal in which Google would sell search ads on Yahoo's site, which could generate incremental revenue for both. Google's return on search ads is about 60 percent to 70 percent more that what Yahoo gets via its search ad serving.

This deal might have trouble getting past regulators, but it signals that Yahoo is willing to cede search ads to Google. How long before it cedes display ads to Google? Probably never, especially since regulators would balk at this move and Yahoo has built what is viewed as a solid ad platform. One issue is whether Yahoo can retain the talent to sell ads and to evolve its technology.

My guess is that Yang and company hope to earn the exclamation point with a new platform that adds a social dimension to its services. This transition involves inserting a Facebook-like social graph into the core of Yahoo's platform and making it available to any application from Yahoo or third parties. In a note to the troops this evening, Yang wrote:

"We'll continue to execute on our plan -- making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo! in a way that developers dream of."

Last month, Yahoo CTO Ari Balogh outlined what he called Y!Open, following a sneak peek of the concept by Yang at CES in January.

During his CES sneak peek, Yang demoed a scenario of planning a dinner for friends in a future version of Yahoo. You can drag the thread of an email conversation into a map, and the profiles of those on the e-mail string are surfaced, noting preferences (for food in this case) and suggesting appropriate restaurants in the area.

Balogh laid out the Y!Open challenge in his Web 2.0 Expo keynote:

"We are taking open to a whole other place. We are rewiring Yahoo from the inside out with a developer platform that will open up the assets of Yahoo in a way never done before, making the consumer experience social throughout and providing hooks to developers."

He noted that Yahoo has 10 billion latent connections across its 500 million users and properties, such as e-mail, instant messenger, and fantasy sports.

Will Y!Open prove that the company and its leadership deserve the exclamation point? Balogh told me that the rewired Yahoo, which is slated to trickle out this year, will have a material impact on Yahoo's page growth and time spent on the site, resulting in increased revenue. It was baked into the calculations projecting a doubling of its operating cash flow from $1.9 billion to $3.7 billion in a three-year span.

However, Y!Open is a major technical and marketing challenge. "We have to replumb Yahoo to use a single profile and create feeds, a way to consume feeds and Web services APIs and to layer those mechanisms into the platform," Balogh said. "The goal is nothing short of creating the best developer environment for creating Internet applications across the Web."

Y!Open is the right move strategically, but it's a long way in Web time from the exclamation point.

If Yahoo's chief executive expects to have credibility, render shareholder value, keep the company independent, prevent the exclamation point from falling off the brand, and maintain his current job, he had better hope that Y!Open comes sooner than later and is a massive success.