All Things Digital

Is it just me or does the sudden prospect of venture capitalists–the very investors who fueled the Web 2.0 valuation insanity with their typically egregious overfunding of start-ups–lecturing about the bleak economy and the need to tighten belts seem just a tad ironic?

It’s kind of like Washington politicians who handed out-of-control bankers one deregulation after another in exchange for campaign donations now mounting their high horses and decrying Wall Street greed in the current economic meltdown.

And yet, just like that, Silicon Valley’s investors–who could spin you all the way to next Sunday about how Facebook was actually worth $15 billion, despite not having much revenue quite yet–are turning into penny-pinching accountant types.

As reported by Om Malik of GigaOm in a piece titled “Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble,” for example, Sequoia Capital–one of tech’s most powerful and successful VC firms–held a meeting where it told its portfolio companies that the downturn was quite serious and advised them to start cutting costs.

Apparently, there was even a picture of a gravestone with “R.I.P.: Good Times” displayed at the gathering, in case the start-ups did not get the sledgehammer message. (And here is an update on the meeting by Malik.)

The last time Sequoia did this was when the Web 1.0 bubble was popping in 2000.

The same communication was also sent out to entrepreneurs by angel investor Ron Conway then, and now yesterday again.

The typically jovial Conway (pictured here) sent out a grim email to the start-ups he is invested in, advising they lower their burn rate to get ready for the tough times ahead.

Wrote Conway: “Unfortunately history DOES repeat itself but I hope we can learn from history and prevent the turmoil from occurring again. The message is simple. Raising capital will be much more difficult now … the name of the game in this environment in some respects is survival–survival until conditions change.”

Now he tells us!

In all seriousness, these kinds of prescriptions should have been front and center when times were presumably good, especially after the first orgy of Internet frothiness ended with such a thud.

Instead, the all-trees-grow-to-heaven attitude, the massively inappropriate valuations, the revenue-what-revenue strategies have been pushed on entrepreneurs in this cycle by too many VCs, most of whom should have known better.

And, while it is right for Sequoia and Conway to sound the alarm, I expect all the VCs who touted loudly will now climb aboard this somber bandwagon.

Because, after handing over too much money to start-ups like drunken sailors on shore leave, it is apparently now Sunday morning and time for a little salvation.

But not completely, of course, since this is still an industry where the dreams of hitting it big never die.

After I jokingly called Conway “Oh voice of doom and gloom” after reading his email, he quickly wrote back: “NO WAY DOOM AND GLOOM. I think innovation in the Valley will continue to thrive and I will continue to invest.”

Of course, Conway will. It wouldn’t be Silicon Valley if he didn’t.

And to raise your spirits from these wet-blanket VCs, here’s a video of Mike Settle singing the classic “What Shall We Do With the Drunken Sailor”:

Just as there is a tendency to inanely cheerlead the tech sector valuations on the way up, there is inevitably the equally ridiculous overreaction to the downward slide going on right now for digital companies.

Thus, while by no means the weakest sector of the economy, a range of tech stocks got hammered today in the markets, getting dragged down with the market at large as investors continued to fret about a sustained worldwide recession that government bailouts could not prevent.

Consider, after a week of getting socked, even more blows:

Yahoo (YHOO) closed at $15.19, down about 5 percent or 81 cents.

Google (GOOG) closed at $369.37, down just under 5 percent or $17.54.

Microsoft (MSFT) closed at $24.91, down 5.4 percent or $1.41.

eBay (EBAY) closed at $17.89, down 5.5 percent or $1.05.

Interestingly, the company with the most consumer exposure, Apple (AAPL), fell below $90, before closing at $98.14, up 1.1 percent or $1.07.

Now, there’s no question some of this tech carnage was due to the sector riding higher than most and worries about future results. Analysts are cutting estimates across the industry, in anticipation of weaker advertising and international markets.

At this point, as much as BoomTown has warned about the impact of the financial crisis on Silicon Valley, the meltdown in tech shares is beginning to feel a little undeserved and overdone.

After all, does anyone doubt most advertising will move online? Or that tech will not continue to permeate all sectors of our society and economy in the decades ahead? Or that digital companies, for all their fattening up of late, are not the most adept at adapting themselves to leaner times?

After all, everyone in tech did learn a thing or two from the bursting of the last bubble, which was entirely appropriate.

This time, while the industry had begun to party like it was 1999, the more recent expansion–aside from the lofty valuations for start-ups–was done in a way that will make it much easier to cut back.

I kind of feel like I might be channeling Chip Diller, the annoying ROTC cadet in “Animal House” (played by Kevin Bacon), with his famous line, “All is well, remain calm,” even as all hell was breaking loose around him (see video below).

But with a little rejiggering, it’s still the right prescription for the months ahead. In the short term, all is not well.

Nonetheless: Remain calm.

Yesterday–in a patented playbook move–some top Microsoft execs didn’t miss a chance to slap around Yahoo over its shareholder vote debacle, letting it be known to industry insiders (on the very loud QT, of course) that the Internet company knew full well that its biggest investor, Capital Research & Management, was going to vote a large number of shares against it.

Thus, it was just a hop, skip and a leak before their sentiments got hand-delivered to the doorstep of BoomTown HQ.

In essence, Microsofties are arguing that knowledge of a major investor’s dissatisfaction should have prompted Yahoo (YHOO) to question its unusually positive voting results at its annual meeting on Friday and ask the outside voting tabulator to recheck its numbers before officially releasing them.

As it turned out, the tally by Broadside Financial Solutions, an outside firm that conducts the tabulating for investors, was highly inaccurate related to the number of shares withheld by investors for particular board members.

As reported Friday, for example, Yahoo CEO Jerry Yang only had 14.6 percent of shareholder votes withheld, with 85.4 percent voting for him, which was better than the year before.

The new results saw Yang’s disapproval more than double what was previously reported, rising to 33.7 percent.

This huge delta was due to errors in counting the no votes from funds owned by Capital Research, which holds an overall stake of about 17 percent in Yahoo.

“They had to see the discrepancies,” said one source close to Microsoft’s (MSFT) thinking. “Yahoo was hoping no one would notice.”

While BoomTown is careful to consider the sources here–the collapse of Microsoft’s takeover bid for Yahoo has left quite a bit of acrimony between the pair–they actually might have a point.

Sources at Capital Research certainly agree, saying they unequivocally told Yahoo leadership that they were going to withhold a substantial number of votes from certain members of the company’s board.

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The vote is now in and it’s not so pretty for Yahoo, as it turns out.

Broadridge Financial Solutions’ corrected tabulation of the vote at the Yahoo annual meeting on Aug. 1, without the “truncation errors,” came out and, it seems, shareholders are actually mighty irked at Yahoo leadership.

Most glaringly, the new result shows Yahoo CEO Jerry Yang’s disapproval more than double what was previously reported, rising from 14.6 percent votes withheld to 33.7 percent. Yahoo Chairman Roy Bostock saw his shares withheld rise from 20.5 percent to 39.6 percent.

Yang (pictured here), who has been under fire for his management of Yahoo (YHOO), is likely to now endure yet another round of questioning about whether he should stay in his job in the wake of this massive show of disapproval by investors.

Here is part of Yahoo’s press release, with the correct and incorrect tables below:

Yahoo! Acknowledges Tabulation Error by Broadridge

Jerry Yang (893,055,602/85.4%; 153,039,982/14.6%)

Here’s the full statement (below) from the outside firm, Broadridge Financial Solutions, that tabulated Yahoo’s recent shareholder vote.

Bottom line: An underreporting of shares withheld for certain directors, which the Lake Success, N.Y., shareholder services firm is calling an “isolated incident” and also a “truncation error.”

That sounds painful.

And it is likely Yahoo CEO Jerry Yang will feel much of that pain, as sources said the shares are largely those that were withheld from him by disgruntled shareholders.

While the mistake will not change the vote’s overall outcome, in which all current Yahoo (YHOO) directors were re-elected, it will surely make the no-vote tally worse than first reported for many directors, and underline more clearly the increased investor disappointment directed at Yahoo leadership.

As reported Friday, for example, Yang only had 14.6 percent withheld, with 85.4 percent voting for him, which was better than the year before.

A Yahoo spokesman said the company was redoing its results, based on the new information, and would release the new numbers soon. The Internet company did not do the vote tabulation.

The examination of the results was prompted by an unusually positive Yahoo shareholder vote, when it did not seem to include the withheld votes of one major Yahoo shareholder.

Thus, Capital Research & Management asked Broadridge for a recount of its votes.

The problem centered on how shares were tallied in the Yahoo annual meeting, specifically related to a group of votes withheld by Capital Research Global Investors.

That fund owns almost seven percent of Yahoo, and its head, Gordon Crawford, had recommended withholding votes from Yahoo.

Here is the statement from Chuck Callan, Senior Vice President Regulatory Affairs at Broadridge:

On August 4, Broadridge was notified by an investor of a potential discrepancy in a reported vote at the Yahoo Annual Meeting on August 1.

On August 4th Broadridge notified Yahoo’s Inspector of Elections and Tabulator of the problem, and a revised report was issued on August 5th.

All Yahoo needs now is for former Florida Secretary of State Katherine Harris to show up and start recounting votes.

It could happen, given all the crazy characters who have been drawn to the much-beleaguered Internet company like a magnet, in 2008.

It’s almost as if there is a voodoo curse on Yahoo (YHOO).

So, you didn’t think the digital gods would let it have more than one weekend of good news, did you?

No, they will not, it seems.

After the annual meeting last Friday, which went off without a hitch and, more importantly, without an expected major shareholder vote against the company’s management and board, you could feel a palpable easing of tension among Yahoo leadership and its exhausted PR team.

By Monday, the Yahoo shareholder kerfuffle–in essence, one major shareholder of Yahoo has asked for its outside tabulator of investor votes at the annual meeting for a recount–had landed with a thud.

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There is a mini-tempest brewing over how shares were tallied in the Yahoo annual meeting last Friday, specifically around whether a group of votes withheld by one of Yahoo’s major shareholders was not counted, counted incorrectly or even voted incorrectly by the investor.

According to sources close to the thinking at Capital Research & Management, the proxy committees for its two large funds that hold a significant stake in Yahoo (YHOO) recommended last week that they withhold votes specifically from CEO Jerry Yang and from various board members, such as Chairman Roy Bostock, to register disappointment with their performance.

Thus, the investment fund confirmed it had approached outside vote tabulator Broadridge Financial Solutions, a Lake Success, N.Y.-based financial services company that does securities clearing and processing, to investigate whether those votes were correctly counted on behalf of its Capital Research Global Investors fund.

Capital Research Global Investors–one of two funds separately managed at Capital Research & Management–owns 6.5 percent of Yahoo, according to recent filings, and Capital World Investors owns 9.8 percent.

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So when will Microsoft (MSFT) and Yahoo (YHOO) really start talking again?

Much sooner than later, if investors have their way.

While the pair have not had any substantive new talks as yet, despite reports they had, BoomTown would expect pressure from those shareholders (if not a dose of sanity in the face of the Google juggernaut) will bring them to the table within the next week.

While the software giant has no interest in buying all of the Internet portal, under a scenario that was first suggested to Microsoft by major Yahoo shareholders–including activist investor Carl Icahn, who is waging a proxy war against the company–a more substantial search deal could effectively give Microsoft control over Yahoo.

How?

By beefing up all the terms of the partial search-ad deal Microsoft proposed recently, a deal it lost to Google (GOOG), especially the possibility of buying one-third or more of the company from investors at a price of $30 to $32 a share.

If Microsoft upped that stake, combined with the shares of other major investors, that would essentially give it and them a lot of control over the destiny of Yahoo.

That would mean, of course, the dumping of the much-touted Google deal Yahoo agreed to only two weeks ago.

Microsoft is contemplating the idea seriously, sources said, and its execs are busy preparing a new search-ad offer, although the company has not held any formal renewed talks with Yahoo thus far.

But, if this idea gains traction, Yahoo sources said there is little the company’s board could do to resist it and, in fact, key board members are also now interested in it.

Buying such a large stake in Yahoo is a bold move, of course.

Previously, as I posted two weeks ago and as was outlined again in a letter about a Microsoft search-ad offer released today by Yahoo, Microsoft had offered to buy 16% of Yahoo for $8 billion at $35 a share.

Microsoft was mighty irked by getting kicked to the curb by Yahoo, which has since insisted the Google deal was superior.

Not to Wall Street. Since then, Yahoo shares have dipped even lower, to about $22 a share today.

So if something does not happen, Yahoo’s annual meeting on Aug. 1 should be a doozy.

CNET’s excellent Charles Cooper ran a story outlining the possibility of a big-bowl-of-sugar-sweeter deal between Microsoft and Yahoo today, but it did not outline specifics, such as a larger stake or investors being key to its momentum.

But it is indeed pressure from disgruntled investors that has fueled action of late.

Because of that, sources said, some Yahoo board members–including board chairman Roy Bostock–have concluded the company must do some sort of deal with Microsoft, especially if it keeps Yahoo independent.

But independent does not mean that Yahoo CEO and Co-Founder Jerry Yang or President Sue Decker would necessarily be at the helm.

That might be why the pending announcement of a reorganization, which BoomTown outlined last week in detail, might have been delayed.

Not so! In fact, sources said, the reorg will be announced tomorrow morning.

Investors liken the reorg, being planned by Decker, to shifting around deck chairs on the Titanic.

“It’s over for Jerry–he is out of it,” said one major investor, who–like many–has lost patience with the pair. “And Sue is just too tied to him to remain.”

That might be wishful thinking, but sources close to the Yahoo board said the idea of doing a better Microsoft search-ad deal and also bringing in new leaders is gaining traction as options dwindle.

At least two board members, sources said, who feel they have not been heard, are contemplating leaving the board, and disappointment with Yang’s management appears to be the major reason for it.

And Bostock and others who have been key to the Microsoft talks and have been closely aligned with Yang now realize they must change course and perhaps leadership, sources said, especially as a significant number of top executives have left recently.

Despite all this hubbub underneath the surface, Yahoo has been publicly and loudly backing the search-ad outsourcing deal with Google that it struck.

In a letter to shareholders released today from Yang and Bostock, they noted about the Google deal: “This carefully structured agreement strikes the right strategic balance..”

And, of course, they also whacked the proposed Microsoft deal Yahoo rejected, adding:

“While Microsoft’s search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business.”

But the Google deal would be undone in the new scenario.

That might not be such a bad thing, though. The Yahoo-Google partnership is already raising troublesome questions from politicians and regulators, which is worrisome.

If Yahoo dumped the deal, the company would have to pay Google $250 million.

In addition to that cost, under the beefed-up search deal, Microsoft probably would also improve on all aspects of its offer, with more revenue guarantees on search ads and a higher price for search assets it would buy outright.

If Microsoft bought that large a stake, though, Yahoo’s worries about an exclusivity agreement Microsoft has wanted would be less problematic.

And, to add further complexity, I would also not be surprised to see an old Microsoft ally, like News Corp. (NWS), also brought into the picture, if talks proceeded.

Could it lead to more than just a search-ad deal to buy the company whole? I doubt it, as one Microsoft exec after another has insisted to me that the real prize for the company is Yahoo’s search share and search-ad business.

“A larger deal is unlikely in the extreme,” said one exec about a whole takeover. “That chapter is done.”

(Unfortunately, we’re not quite done with block-that-metaphors on the issue, like this moooooving one one from TechCrunch: “But for now, a clear message is being sent to Microsoft: If they want Yahoo’s search milk, they’re going to have to buy the cow.”)

In any case, there have been no formal negotiations yet, but as I also noted in many posts this week, there should be.

I wrote:

“It’s perplexing to me, for example, why Yahoo’s highly ineffectual board is not breaking land and speed records to try to revive a buyout from Microsoft or why Microsoft isn’t itching to do a deal now that the price is so low that Yahoo is practically giving itself away. At the very least, Microsoft should have and should still try to win the partial search deal, as it needs that market share badly to compete with Google.”

In other words, Microsoft and Yahoo: Get thee to a nunnery, oops, real negotiating table. And fast.

Look, a Yahoo-Microsoft deal could happen anytime. Just not yesterday, as it turns out.

It’s easy to be taken in by so-called “sources,” chatting up a new series of talks between Microsoft (MSFT) and Yahoo (YHOO), either to do a deal to revisit the partial search-outsourcing partnership or to try to one-up that by claiming rather grandly that there is yet another effort to buy the company whole.

But with Yahoo’s stock dropping like a knife and hovering near the dangerous $20-a-share mark yesterday, anyone reporting on the situation should have been deeply cautious about floating rumors about renewed deal-making between the star-crossed pair.

As it is often said, there’s one born every minute, and like clockwork, Yahoo’s stock got an undeserved boost due to those unconfirmed stories.

You did not hear it here first, because BoomTown suddenly got the exact same calls too yesterday–coincidence? I think not!–from “sources” touting Microsoft-Yahoo as “back on.”

But I simply could not confirm it to our site’s standards of reporting. Which is to say, aiming for trying to report with full accuracy versus repeating errant chatter that is so typical now in this deal.

Thus, I declined to crunch on that tasty, but non-nutritious, morsel and opted instead to try to get confirmation from sources who actually knew what is going on.

And those sources at both Yahoo and Microsoft, who certainly can spin like dervishes when need be, emphatically went out of their way yesterday–which is not so typical–to deny any talks were going on or that anything had changed since Microsoft had walked away from a bid for the whole of Yahoo in May or since it had lost out on another effort to do a partial deal.

While both sides did emphasize that nothing was different as of “today” (meaning yesterday, as no company ever wants to close the door, do they?), they did so since talks could obviously resume anytime.

That’s especially true, as Yahoo’s shares inevitably decline even further today when the market opens and investors take in the fact no deal is happening yet again.

That’s not to say that smart analysts should not opine about the should-haves, would-haves and could-haves of this takeover that was clearly botched by both sides.

It’s perplexing to me, for example, why Yahoo’s highly ineffectual board is not breaking land and speed records to try to revive a buyout from Microsoft or why Microsoft isn’t itching to do a deal now that the price is so low that Yahoo is practically giving itself away.

At the very least, Microsoft should have and should still try to win the partial search deal, as it needs that market share badly to compete with Google (GOOG).

In fact, right before all the noise started up, I noted rather emphatically yesterday that such talks should resume, given the cheap price and obvious need of Microsoft to acquire Yahoo’s still-attractive assets.

As I wrote:

But if Yahoo shares decline further, it should think twice. And then it should slap itself silly, until it realizes the opportunity it might be missing…

Why? Because, for all its management problems, Yahoo remains Microsoft’s single most important path to winning in the online display business and at least keeping itself in the game with Google in search and the search-ad business.

Yahoo is a much tarnished jewel, to be sure, but a jewel nonetheless.

And, if you really think hard about it, it is still Microsoft’s best chance to shine.”

That’s because, as I also wrote yesterday, also right before the heedless hubbub:

Microsoft does not have a secret plot to buy Yahoo.

Maybe Microsoft CEO Steve Ballmer should be hovering in the wings, like a digital Simon Legree ready to pounce again on poor Yahoo CEO Jerry Yang.

But he’s not.

And still the hopeful, the suspicious and, most of all, the beaten-down Yahoo shareholders continue to jump on any utterance from the software giant, even woefully mistranslating interviews with its top execs, to make it so.”

As the old cliche goes, if wishes were horses, all beggars would ride.

And, for now at least, investors in Yahoo might soon learn all about the beggar part, but none will be getting a free ride. In fact and incredibly, the road ahead looks bumpier than ever.

Right now, Yahoo shares are flirting with a dangerous threshold of below $20 a share–at this moment, shares are at $20.88.

Of course, the last time Yahoo (YHOO) went under the $20 level is when Microsoft (MSFT) mounted its takeover bid for the company, which was unveiled Feb. 1.

The price right now means Yahoo has a market share of almost $29 billion, substantially below the offer of $33 a share Microsoft offered that was worth upwards of $41 billion.

“Depressed does not even begin to describe it,” said one major Yahoo shareholder, in response to BoomTown’s query about what the mood was among Yahoo investors.

As I wrote earlier today, Microsoft does not seem interested in picking up Yahoo now at any price.

But if Yahoo shares decline further, it should think twice. And then it should slap itself silly, until it realizes the opportunity it might be missing.

Who cares if Yahoo partnered with Google (GOOG) to spite it? Who cares if its management pretzeled itself into every shape possible to avoid Microsoft? Who cares if Yahoo’s board has consistently misbehaved and sent the software giant really mean letters?

Why? Because, for all its management problems, Yahoo remains Microsoft’s single most important path to winning in the online display business and at least keeping itself in the game with Google in search and the search-ad business.

Yahoo is a much tarnished jewel, to be sure, but a jewel nonetheless.

And, if you really think hard about it, it is still Microsoft’s best chance to shine.

Sure, Microsoft and Yahoo are talking this weekend and they are talking about a lot of configurations of a revived deal to merge the companies together in some way that makes all parties happy.

But make no mistake: It is Yahoo (YHOO) pushing the one-price-buys-all idea, while it is Microsoft (MSFT) that would still prefer to buy just some of Yahoo’s assets, specifically its search and search-ad business.

Why? Look no further than Microsoft Chairman Bill Gates, who has been relatively silent as this whole takeover circus has unfurled over the last several months.

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Several major investors in Yahoo–who have been, how shall BoomTown put this delicately, freaked out by the sudden departure of Microsoft from the deal two weeks ago–have blamed the passive-aggressive style of Yahoo, and especially Yahoo CEO and Co-Founder Jerry Yang, on the collapse of those talks as a big problem.

They were also plenty irked that Yahoo then said big investors were with them on turning down the $33 price in its takeover bid.

But this time, according to several investors, Yahoo is making sure things go a little better, especially given the increasing anger on the part of its shareholders and the recent proxy attack from billionaire investor Carl Icahn.

Thus, Yahoo’s Chairman Roy Bostock himself has assured major investors that there are now others in the room–such as Yahoo’s independent directors, who are being called “adult supervision”–to make sure Yahoo’s (YHOO) latest revived talks with Microsoft (MSFT) go more smoothly.

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Unfortunately, for CNET (CNET) Networks, it’s not an April Fool’s joke, but more lump of coal to the tech news and review site’s management and board.

Today, a group of very obviously stubborn activist investors, who have been seeking to gain CNET board seats and make other major changes at the company to boost its moribund stock price, will release their own assessment of the situation at the company called, “CNET: Value-Unlocking Change For All Shareholders.”

And their conclusion is no surprise: CNET has failed to deliver for shareholders and its whole operation, along with the board and executive suite, need a complete overhaul.

Since CNET’s major shareholders have been relatively passive and complacent, despite recent declines in the company’s stock price, it is not clear exactly how effective such tactics will be.

And last week, CNET kind of beat the disgruntled group to the punch by throttling itself and announcing that it was conducting layoffs and also making a variety of key changes, as part of a task force to improve the company’s performance.

As BoomTown wrote in a post about the situation:

Thus, to assuage Wall Street, the courts and, well, to look like it was getting busy, CNET laid off 10 percent of its U.S. workforce, or 120 employees, as well as saying it would be fixing a range of other things gone wrong at the company.

That included cutting costs, upgrading technology, rejiggering content offerings, fixing the sales process and “implementing business unit changes to realign resources to support the company’s strategic priorities and promote efficiencies.”

Well, at least the bathrooms are in good working order! But otherwise, that would be everything, right?

Interestingly, the 38-page report–prepared by an activist group led by Jana Partners, and includes Alex Interactive Media, Sandell Asset Management, Spark Capital Management and Velocity Interactive Management–agrees, except that it wants to shove aside the current crew at CNET and be the ones to make the needed changes.

As the group notes in the report’s executive summary not-so-subtly titled “CNET’s Destruction of Shareholder Value”:

The current leadership of CNET Networks Inc. (”CNET” or the “Company”) has presided over massive value destruction, with CNET’s shares declining (25)%, (52)% and (21)% in the one, two and three year periods ended March 28, 2008, respectively, compared to 39%, 6% and (1)% changes, respectively, for its stated benchmark peer index, as set forth herein. Also as set forth herein, CNET has also consistently underperformed peers in profitability and growth, ranking last among these peers in key metrics. This underperformance comes despite CNET’s premiere assets, including the tenth largest collection of Internet sites in the world and strong brands and content.

CNET’s current leadership now claims it can reverse course and begin creating shareholder value, but we believe they have offered no evidence that they can do so. Despite years of shareholder value destruction, CNET’s leadership during this time failed to act on the urgent need to make fundamental strategic and operational change, instead pursuing a failed expansion strategy even as CNET fell further behind. CNET’s leadership did not even start examining the basics of improving performance until we called for change, both publicly and directly with CNET’s Board of Directors.

In addition, we believe CNET’s Board and senior management lack the industry-specific experience and expertise to stop this shareholder value destruction. CNET’s Board of Directors’ backgrounds in our opinion are primarily in traditional media or early-stage technology rather than today’s digital media landscape, while its senior management team consists primarily of first time senior public company executives without significant operational experience at large Internet companies other than CNET.

Also, they take candy from babies!

Okay, maybe not that, but the group, which admits in the report that it is only an external review, posits that CNET needs a new board, made up–natch!–of its selected members.

That includes former AOL head Jon Miller, CAA exec Brian Weinstein and other Web execs from IAC and Overture, as well as reps from Spark and Jana.

The report also insults CNET’s expansion into verticals, such as shopping service MySimon, and calls its transition to Web 2.0 technology cloddish.

As for recommendations, the report says CNET must improve things like its monetization infrastructure, build a vertical ad network, make third-party ad deals, turbocharge its SEO techniques, add in more social media doodads, fix its publishing and content management system and, of course, cut costs.

The report also denies that the activist group is seeking to control the company, in order to essentially buy it without paying a premium, as CNET has contended.

And, finally, it outlines the grim road to the current tensions between CNET and the Jana group, including failed settlement talks, corporate moves and countermoves and, inevitably, the legal action.

For now, CNET’s board and management do not seem inclined to change their stance on its mano-a-mano with Jana, which recently won in court over being allowed to nominate directors to the board of the company. CNET has said it would appeal that ruling.

Clearly, CNET is taking a hard line, despite the fact that it has a somewhat weak position in regards to its glaringly obvious performance issues.

Thus the report from Jana, which is, basically, a we’ll-see-about-that! response.

In fact, as the report notes at the end:

CEO Neil Ashe has referred to this contest as a ‘chess game,’ which we believe perfectly encapsulates CNET’s misunderstanding of the situation. This should not be a game of legal tactics but a debate about the future of CNET and who is best qualified to guide the strategic direction of the Company and create maximum shareholder value.

No checkmate yet, of course, but now it is clearly CNET’s move.