I stand by my assertion that Yahoo!'s problems have been caused by a departure from the fundamentals that built the company, and that by returning to their roots as a pragmatic and utilitarian service, they'll once again be a force to reckon with. Yahoo! is best when it's a Fast Follower, innovating on the back end and letting other companies try to figure out the next best thing, and either buying/integrating or duplicating those services once the market has been created.
My best comparison to what Yahoo! could become would be Wal-Mart - by going into any of their stores you wouldn't notice anything particularly amazing, yet Wal-Mart has been one of the most innovative companies when it comes to the back end process of distribution and has become the dominating force by providing practically everything to consumers for cheaper than anyone else.
Yahoo! is sort of like that. They have a huge array of services, many of them very profitable (personals, broadband, etc.) and over the years they've been able to continually serve more traffic than most of us could possibly imagine. While companies like Twitter struggle to stay up, Yahoo! is rock solid in the face of billions and billions of page views. (The back end is really where they've innovated and improved successfully, and anyone who doesn't think so should go try to do it themselves.)
A couple examples of successful Fast Following to prove my point would be Personals and Buzz - two products that came about well after the competition had shown there was a market there. Yahoo! adequately copied the market leaders (Match a few years ago and Digg more recently), then turned on the firehose of traffic that is Yahoo!'s home page, and *bam* successful products. (Salon reported that they got their highest day of traffic ever when Yahoo! put one of their Buzz stories on the front page... and that was just for a short period of time.)
This is what Yahoo! could do for any number of currently popular web services out there. In fact, I'd say that Yahoo! is a sleeping giant that may have finally been awakened. Yahoo! tried to compete with Google in the nebulous area of innovation, but (like MS, AOL and others) failed to recreate the money-machine that GOOG stumbled upon itself. It was a good effort, and at the time an obvious one to make, but that sort of thing is (IMHO) really anathema to what Yahoo! is really about. Yahoo! doesn't need innovation - it simply needs aggression. Remember the days when any business plan you came up with had to have a slide that dealt with what would happen if Yahoo! chose to enter your market? Well, those days have gone, but they could return if Y! chooses to make it so. I can think of any number of startups out there that would feel definite and permanent pain if Yahoo! started acting like a general competitor in the Web as a whole again, instead of the more benign presence they are now.
In fact, I think now that Yahoo! has essentially stopped setting its sites on Google, the rest of the Valley should be sitting up and taking notice, rather than laughing at Yahoo! like they are now. Now that they seem to have stopped hunting the big game, there's lots and lots of smaller prey out there for the taking.
All this said, Yahoo! has big problems when it comes to some crippling bureaucracy, and the stock price is going to make it really hard to attract talent in a Valley filled with both Google and pre-exit companies like Facebook. But there's still a lot of talent there, and Jerry Yang (whom I worked for) is a smart guy who really gets it. If he can get enough time to reshape the company back into that practical website that he and David Filo started years ago, success isn't a question, but a inevitability.
I believe, do you?