I think the issue was the people running it were the type of people who are taught to ruthlessly look at a spreadsheet and decide if Coca Cola can invest X in marketing and product development they can expect to get Y back (with reasonable accuracy). Of course with software small teams can do big things so these calculations are almost impossible.

Investing a billion dollars in your search engine in ~2008 might be considered insane of course. We were told by Carol Bartz at an all hands that they had done the work on their spreadsheets and they could not compete with the investment Microsoft and Google were planning. It still annoys me to this day that there was no discussion or attempt to decide if the engineers and the company were up for the challenge with Google, even with less money. I'm not saying Yahoo! would have won, but to not even have bothered trying still irritates me - where is your vision? where is your fight?

Anyway this is my take on it, the management decided to just give up on being technically excellent and even being a software company at some point. The mind boggles why you would do this while software was eating the world and you had loads of fantastic engineering talent...