(Full disclosure, I know close to zero about the business of Yahoo)
Here’s what I’d do:
1) I’d focus R&D to develop a deep scientific understanding of community behavior online (as a function of feature-set), and perfect a suite of services that grow existing communities, and create new ones. I’d make these services open for the web at large to use. (If Amazon can provide the techinical infrastructure for the web, Yahoo can certainly provide the feature/community infrastructure)
2) I’d also focus R&D on cracking the social-advertising/recommendation 'nut’. Google has won on keyword based advertising. It’s over. However, I believe Zuckerburg is correct that something bigger is on the horizon, and even if Facebook cracks it, Yahoo must as well.
3) I’d do a few strategic acquisitions to help R&D here: off the top of my head, Ning for it’s wealth of different communities and user-data, and Lookery for their forward thinking demographic based ad-serving on the web.
4) I'm ambivalent on Yahoo search. Personally, I never use it, nor the portal itself. Whatever makes the most financial sense, Yahoo should explore. I would however be careful to manage image internally: traditional search is not the future of Yahoo.
Combining a success in social advertising with Yahoo’s already impressive understanding of communities, and breadth of communities, would cement Yahoo back into the center of the social web.
Community, community, community, community!
Now, I’ll go read about what Yahoo *actually* does…