For a $20 billion company, Yahoo is in shambles.  Four years ago, its shares were trading at about $30; now, they’re struggling to stay over $15. The board recently ousted the CEO and now, it’s at least an even bet that Yahoo will end up gobbled up by another company or sold to a private equity firm.

But if Yahoo stays independent, here’s an idea for their long-term health: start an incubator for digital media startups.

(And honestly, this same analysis would apply to Aol, too.)

If you’ve been here before, you know that I have a daily email newsletter (“Now I Know”) which is my hobby/side project. I don’t consider it a “startup” per se, but it’s a useful example. It’s not my first media project, either.  Counting tiny ones which I quickly abandoned, I’ve probably had a half dozen. The other significant one was ArmchairGM, which I co-founded. 

In every case, I’ve had three major pain points.  All three would be solved by having the right partner/investor, and that partner/investor could be — and should be — Yahoo.  It’s not about the money: it’s about the value Yahoo can provide by leveraging its current platform for the benefit of the media startup.

Pain Point 1: Audience Acquisition

Personally, I’ve become very good at this.  Now I Know has over 13,000 subscribers and its archives (which I’m slowly repopulating) will break a 250,000 uniques this month. That’s good for a one-man band. But I’ve only become good at it because of a lot of hard work and a ton of failure.

And relative to what Yahoo could do, those numbers are tiny. Rounding errors, even.

Yahoo could crush those numbers without even trying. With over 100 million people visiting each month from the U.S alone, even minimal promotion could lead to a 10,000 subscriber base (or incremental gains) in one shot. For example, an article ranking yellow cake mixes has nearly 1,000 recommendations on Facebook.

Imagine if twice a month, Yahoo aimed its front page fire hose at an archived version of Now I Know, with a call-out to subscribe much like my friends over at mental_floss have.  How quickly would the list grow? Much faster than the 1,000 or so a month I’m doing now.

Pain Point 2: Keeping the Site Up

Hit the front page of reddit, digg, etc, and your server is toast.  Or have something reverberate through the web. Or — well, basically, if you succeed in getting a lot of attention for your content, you may not be able to meet the demand from a server/uptime perspective.

If you’re a technologist, maybe that isn’t true. But if your strength is media, then it probably is. I’ve thankfully finally solved the problem for Now I Know, but it was a constant struggle for ArmchairGM and caused me to deep-six a tiny, short lived project in the interim (which is a blessing in disguise).  It also was a big problem for Now I Know for a while, which is why most of the archives are still on Mailchimp’s site and not moved over to my own domain.

Yahoo doesn’t have this problem, at all.  If Yahoo hosted the media startup, the startup would be able to focus on the business, and not on this center of costs and frustration.  

Pain Point 3: Ad Sales

Pretty self explanatory, right?  Small indy publishers do not have ad sales teams.  Instead, they are already looking at ad networks and/or Google AdSense to power their revenue; Yahoo could be that for their hand-selected media startups.  (To be clear: I’m suggesting that Yahoo syndicate its premium ad buys to these incubated companies. I’m not suggesting a return to the awful awful Yahoo Publisher Network model.)  This would make it immensely easier for the startups to get to “ramen profitable.”

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So that’s why this would work for the startup media companies.  But why would it work for Yahoo?

1) They’re already outsourcing their content creation — but with none of the upside.

The easy answer is that Yahoo is already doing the above — in that they don’t really write their own content.  Right now, the four top stories on Yahoo.com are from a Yahoo blog (NB: auto-play video behind that link), a reproduced New York Times article, a reproduced ABC News article, and a reproduced Reuters article. 

Dig a bit deeper and its more of the same.  The top three stories in their “Tech” vertical? All AP stories.  And Yahoo Finance reprints Business Insider articles, or at least, used to.

But wouldn’t it be better for them if they gave Dan Frommer, say, $40,000 (as an investment) and grabbed equity in SplatF.  Note that Frommer is already well established, and SplatF has already demonstrated itself to be a viable media product (#32 on the Techmeme leaderboard; reasonably good viral pickup; Frommer’s reputation; etc.) Yahoo would drive traffic to SplatF, rep its ads, and host the site, but it would otherwise be managed independently.  Chances are, it’d be the size of most of the tech blogs out there pretty quickly — assuming Frommer could hire quickly enough.

This isn’t to say Frommer — who I’ve never met — would accept.  But you could see a similar story happening, many times over.  In fact, it’s a model is easy to repeat across verticals.

2) The investments wouldn’t really cost Yahoo much, if anything.

I don’t have data from Yahoo, but I do have some for Aol, via their “Aol Way” deck from earlier this year.  For low end articles, Aol was doing $5 CPM.  And those articles cost them $25 a pop.  Some fuzzy math means that each post needed 7,000 page views to break even; that’s $35, so we’ll go with that.   For high end, they were making $9 CPM and required 40,000 PVs to break even; that’s $360, and the deck says $250.  So Aol’s math is $1 of investment in content requires $1.44 in revenue to break even.  

Let’s say, again, that my $40,000 investment is in the right ballpark.  Let’s also assume that Yahoo offers the media startup a 2-to1 split on ad revenue, with the startup getting the lion’s share.  We’re probably close to the $9 CPM here, but let’s go with $6, just to be on the safe side.

Yahoo is paying $40,000 — lump sum — during the period the media company is in the incubator, let’s say a year (but note that the two sides can easily agree to continue the hosting and ad sales relationship, if not the audience acquisition part).  At $40,000, Yahoo needs to make about $57,600 to break even, using Aol’s numbers. At $3 CPM — Yahoo’s cut — they’d need the startup to serve 19,200,000 pageviews during the length of the relationship.  

Looking at my own traffic numbers, and noting that Yahoo hasn’t done a single thing to help me grow it, I can say pretty confidently that a high-quality media project can hit that.  

Basically: whatever lump-sum payment Yahoo makes to get its equity investment come back via ad sales.  There’s almost no risk here, even if you swing big and make a thousand incubated investments in a given year.

3) Yahoo can win without an exit.

And imagine if the investment is in a platform.  Think Yelp or Wikia or CafeMom, or maybe even reddit (which actually was a YCombinator company).  Or a user generated recipe site; gdgt; SBNation; etc.  A site where the community produces the content and the editors are benevolent overlords.

These sites can do tens of millions of pageviews a month even early on.  According to quantcast, Wikia, which is still a privately held, venture backed company, is doing about 800 million PV/month.  But even in July of 2008, per quantcast, it was hitting about 200 million.  It wouldn’t be hard to see them, if a Yahoo-backed incubated company, sticking with Yahoo as their ad provider (even if only for remnant) for a long, long time.

4) And Yahoo can buy the site in the end.

Yahoo would definitely want a first right of refusal over any acquisition.  Because they’d own a percentage of the company beforehand, any acquisition would be less expensive for them than others; also, because they’d potentially be handling a lot of the operations stuff and ad sales, they could better estimate the value of the company.  It wouldn’t be hard, at all, to imagine Yahoo growing tremendously by acquiring those companies they incubated.

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Yahoo’s roots, historically, were in curation: Find great stuff on the web and share it in directory format — “home-brewed lists of favorite links.”  They once linked to a nascent site called Amazon after calling its CEO to warn them about the torrent of traffic; Amazon’s business took off soon after.  That day has come and gone, but Yahoo can recapture that — and capitalize on it — if they embrace entrepreneurs.