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The internet is booming. Consumers are spending freely online, social networking services are thriving and the public markets are open for business.

But today's internet gold rush has largely passed one of the internet's most storied brands, Yahoo, by, and now the company's inability to capitalize on new opportunities is catching up with it.

This morning, in a widely-anticipated move, Yahoo announced that it is laying off 2,000 employees, which represents about 14% of its staff. Yahoo's new CEO Scott Thompson says the painful layoffs are necessary to restore the company to health:

Today’s actions are an important next step toward a bold, new Yahoo! – smaller, nimbler, more profitable and better equipped to innovate as fast as our customers and our industry require. We are intensifying our efforts on our core businesses and redeploying resources to our most urgent priorities. Our goal is to get back to our core purpose – putting our users and advertisers first – and we are moving aggressively to achieve that goal.

Yahoo expects that the layoffs will save it some $375m annually, giving it a better ability to compete going forward. On this point, the company is quick to point out that it still has a "solid foundation" of more than 700m users and thousands of advertisers.

What will the company do with that solid foundation? Yahoo says it has "identified key parts of the business – a select group of core businesses, the platforms that support those core businesses, and the data that drives deep personalization for users and ROI for advertisers – where the company will intensify efforts and redeploy resources globally, all focused on increasing shareholder value."

To be sure, Yahoo is saying the things many disappointed investors would like to hear. Needless to say, few would argue that Yahoo needs to get smaller, nimbler, more profitable and more innovative. But at the same time, it's not clear how it will accomplish those things with massive layoffs. After all, there's a huge talent war taking place in Silicon Valley. Younger companies like Facebook, Twitter and Zynga are rapidly growing their ranks, and mature companies like Google are still hiring (and acquihiring) aggressively too.

It's clear that Yahoo isn't going to rise to new heights merely by reorganizing; it needs new blood. The question it must now grapple with: how can a company attract great people in an ultra-competitive hiring market when it's laying off existing employees by the thousands? Yahoo's future may depend on it being able to find a good answer to that difficult question.

Patricio Robles

Published 4 April, 2012 by Patricio Robles

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

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