Chief Carol Bartz needs to be doing more than moving the chairs around on the Titanic – bold decisions need to be made

What is Yahoo? It's the question successive chief executives seem to have been unable to answer in any convincing way. Despite defining the first online experiences of many through its email service and news portal, Yahoo has squandered that early start in 1995, with every restructure, every redesign, every reassurance that Yahoo is still in the game seeming less convincing.

Yahoo is expected to lay off around 650, or 5% of its workforce of 14,100. The victims are expected to largely come from its US staff's products group. It is the fourth round of layoffs in three years, it is the latest move by a management desperate to be seen to be turning the company around.

With a contract until 2013 – for which she was reportedly been paid £12.8m for the first year alone – chief executive Carol Bartz needs to be seen to be doing more than moving the chairs around on the Titanic. She reportedly has one year left to make a difference. But speculation is growing over Yahoo's future, some close to the firm are suggesting drastic action.

"Yahoo's a mess," said a source close to the company. "It has hit an iceberg and is sinking slowly."

For Bartz, the ultimate restructure will be splitting up Yahoo by selling off its businesses in China and Japan, which account for half its $22bn (£13.9bn) value. This week Masayoshi Son, chief executive of major Yahoo investor SoftBank, told the New York Times that Bartz "has to make a hard decision." SoftBank has already held talks with Yahoo over its future.

One source close to Yahoo, who did not want to be named, said the most lucrative option – though one that would be extremely unpopular – would be to cut staff numbers down to 2,000, sell off those profitable Japan and China divisions that account for half Yahoo's value and "run the rest for cash into the ground".

Private equity could buy the firm for $20bn and make $40bn over 10 years, said the source, while Flickr – arguably the jewel in Yahoo's crown – could sell for $500m to Facebook, Microsoft or Google.

"The history of Yahoo is the history of getting things a bit wrong," said Dan Cryan, senior analyst at Screen Digest. "Historically speaking, Yahoo wasn't prepared to engage with the thought that good business development sometimes needs to cannibalise itself."

Despite its lead in display advertising, Cryan warns, broadcasters and specialist video sites are now beginning to eat up premium inventory, while Google has search advertising sewn up and Facebook is positioning itself for targeted social advertising. Yahoo has been too slow to move into those areas. "It is better to be a part of that than to let it happen around you. That's what we see now with Yahoo."

"What do you do with a problem like Maria?" said Cryan. "Anything too radical would upset the core business, but staying in this position as a portal is going nowhere. Yahoo needs to focus on what is working, look at ways of maintaining and developing its advertising expertise and perhaps look again at online video."

Several major bungled deals lie in Yahoo's wake. The first was the potential acquisition of Google in 2001. Google founders Sergey Brin and Larry Page met Terry Semel, then Yahoo chief executive, and said Google's price was $1bn but that it was not for sale. A fortnight later, they increased the price to $3bn.

That Semel's response was dismissive says much of his ill-judged decision to focus on Yahoo as a media company, not to mention a lack of vision about how search would come to define the first generation of the web. "You still have the same business you had two weeks ago, right?" he recalled telling the pair. "Which adds up to nothing. So obviously we couldn't and didn't buy the company."

Google stole YouTube out from under Yahoo's nose in 2006. and bought the site for $1.65bn. A deal to acquire Facebook for $1bn in 2006 went as far as a handshake, the Guardian has been told, but that fell apart at the last minute when Yahoo went back to renegotiate on price. A similar thing happened when Yahoo tried to buy eBay in 2008 - a deal which fell apart at the last stage.

"Yahoo had the currency and opportunity to buy anything it wanted," said one source. "It missed not just Facebook but Google, YouTube, eBay ... There's only so many big deals you can fuck up."

Though Yahoo's innovations of location tool Fire Eagle, the Pipes developer tool and the influential Hack Days scored well with the tech community, they have failed to give the company the edge it needs. Constant comparisons with Google don't help, often overshadowing a powerful and successful web company in its own right. Second quarter revenues for 2010 were up only 2% year on year, at $1.6bn

As Yahoo's stock price stagnates at $16, the prolonged takeover attempt by Microsoft, which climaxed in early 2008, looks damning. Microsoft offered an initial $31 per share.

"One view is that Microsoft wasn't ever really serious," said one source. "We would've sold, but we were given advice that it was 50/50 the deal would get through anti-trust, and Microsoft were told the same. If it didn't get through antitrust it would destroy the company, and so there needed to be a credible plan B from Microsoft."

That plan B never came. But there was also resistance among the company's founders. "The critical view is that Jerry and David (Yang and Filo, co-founders) never wanted to sell, and there genuinely was that sentiment." Ultimately, said the source, the board should have pushed harder to get the deal accepted.

Are Bartz's challenges any easier? "Bartz came into a challenging job so it's easy to assign responsibility to her, particularly because she made some bold claims when she started," said Andrew Frank, Gartner's vice president of research. "But in 10 years, I do think the Yahoo brand will have endured, particularly in providing content and communications."