The worst year of Yahoo's life

Ironically, the resistance offered to the acquisition by Yahoo's board and upper management may have worked in Microsoft's favour, giving Ballmer a chance to realise that it's not in Microsoft's best interest to swallow Yahoo whole.

"Buying all of Yahoo made sense on paper, but the reality of making the two companies work together would have been a nightmare," Li said.

There are so many overlaps between the Microsoft Internet unit and Yahoo, that the integration would have been highly complex, requiring a lot of time and effort, when in fact Microsoft only needs the search portion, Li said.

Sensing that Microsoft's acquisition of Yahoo's search business is inevitable, Ballmer recently urged Yahoo to cooperate in getting it done "sooner rather than later."

Yahoo, with its stock in the $12 to $13 range, has much less leverage or negotiating power than it had at the start of 2008. Still, Yahoo would be in an even weaker position without a search business, so it should attempt to cut a more limited deal, similar to the one with Google, Sterling said.

"Yahoo's next main challenge in 2009 is generating search advertising revenue, especially if advertisers continue to pull back on display ad spending," said IDC analyst Caroline Dangson. Not only is search the biggest online ad market segment, but it will remain so over the next five years. "Yahoo has to innovate in search to compete with Google," she said.

Yang did oversee ambitious technical projects to improve services for end users, developers, publishers and advertisers. Some have been delivered; others are in progress, like Yahoo Open Strategy (Y OS), a project to re-architect the company's sites and services to tap into the popularity of social networking.

With Y OS, Yahoo pledges to open all its sites, online services and Web applications to outside developers, and give users a "social profile" dashboard to unify and manage their Yahoo services. Yet, Li faults Yahoo's leaders for taking too long to articulate that strategy: Y OS was announced in late April.

Meanwhile, Google continues dominating search, and its position continues to strengthen, at the expense of Yahoo and Microsoft.

In the third quarter of 2008, Google nabbed 28.4 percent of all online ad spending in the U.S., up from 25.4 percent in the same period in 2007, according to IDC.

By comparison, Yahoo had 12.5 percent in 2008's third quarter, down from 13.3 percent, while Microsoft's share increased slightly to 6.7 percent from 6.1 percent in 2007's third quarter, according to IDC.

In the search segment specifically, Google's share of spending has increased from 50 percent to 54 percent in this year's third quarter, while Yahoo's has dropped from 14 percent to 13 percent. Microsoft also saw a decline of 1 percentage point to 6 percent.

In display advertising, Yahoo's forte, the company has been unable to build on its leadership position, with its share falling 1 percentage point to 16 percent year-on-year in 2008's third quarter. Microsoft held on to second place and improved its share to 12 percent, up from 9 percent. Google, a nonentity traditionally in this segment, grew its share from 1 percent to 3 percent.

Looking ahead at 2009, Li sees in Yahoo a company with many valuable assets but with a management culture that needs a shakeup.

"Can Yahoo become much more flexible and fluid? It has a chance, though it's going to be very hard," Li said.

"My goodness, any company would love to have their user base and their technology," Li added. "Yahoo needs to get out of its own way."