It's easy to understand why confidence – or lack thereof – would have such a huge impact on financial companies like Citigroup or Morgan Stanley. But it's strange to see a crisis of confidence bringing an internet company like Yahoo! to its knees.

Ever since it rejected a buyout offer from Microsoft early this year, Yahoo! has seen its share price head straight down and suffered a huge talent drain. This week's resignation of co-founder Jerry Yang as chief executive had an air of inevitability to it, as did the recent collapse of its search deal with Google.

Clearly, Yahoo! has been hugely damaged by Google's near-total takeover of the search advertising market. Under its previous chief executive, the former Hollywood executive Terry Semel, it made some ill-advised forays into original programming, lost the search battle, and failed to exploit fully its tremendous brand reach.

Yahoo! is in some ways like an old-media company, with its heavy reliance on display advertising, and thus it's also suffering deeply from the broad-based advertising slump that's accompanying the global recession.

Yet Yahoo! still has tremendous assets, including leadership positions in major online tool and content categories such as mail, travel, finance, and news. It remains an iconic brand, with massive organic traffic, and has built a very promising set of services for third parties. The new chief executive of the company will have a lot to build upon.

A healthy Yahoo! is actually quite important to the internet media economy, for a number of reasons. First off, there is the obvious need for a strong counterweight to Google. As web publishers, we at NewWest.Net are increasingly dependent on Google for traffic, for tools such as traffic statistics, for file-sharing applications, even for mail serving. It's all great stuff, but competition is the only way to assure that it stays that way.

While Microsoft is the biggest strategic challenger to Google at the moment, it can't do the job by itself, in part because its DNA is that of a software company and not a media company. Its biggest priority is beating back the challenge posed by Google Apps and other enterprise software solutions; online advertising is still a sideline for Microsoft, and despite its many efforts it still has not shown a lot of competence in this arena.

Yahoo! has also emerged as a critical partner to newspaper companies through the Yahoo! Newspaper Consortium. It still early to say if this venture will live up to its promise, but early signs are that many newspapers are quite engaged in the experiment, which among other things enables them to sell Yahoo! Local advertising inventory in their local markets. Newspapers need all the help they can get at the moment, and if Yahoo! can't help them the result will be weaker online newspaper sites.

While Yahoo!'s interest in original programming is one of the things that got it into trouble, I also think it would be short-sighted for internet companies to take the narrow view that their role is strictly to aggregate and organise information created by others. Google has that pretty well covered, at least for now, and in the long run not everyone can be only an aggregator. There has to be something to aggregate.

The economic downturn is going to be tough for all advertising-supported businesses (even Google) and thus a quick turnaround for Yahoo! is not in the cards. But it would be unfortunate if this moment of weakness led to the break-up of the company, or to a fire sale that had the same effect.

Yahoo! has been down before: in the wake of the dot-com bust, its prospects appeared grim, and Mr Semel for a time looked like a saviour. I don’t have strong opinions about the names being batted about as possible new chief executives, but I hope whomever it is is given a clear mandate to build the company for the long term rather than pursue a quick transaction at the bottom of the market.

A new chief executive can, among other things, have a big impact on confidence. If the company can get a little bit of that back in its corner, it can get on with the job of building on its many valuable properties and becoming, once again, the other internet media giant.

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Jonathan Weber is the founder and editor in chief of NewWest.Net, a regional news service focused on the Rocky Mountain West in the United States. He was previously the co-founder and editor in chief of the Industry Standard