What can Yahoo do?

I think YouTube purchase was a bad decision for Google as well as the industry, not because YouTube is not worth $1.6B but because there are cheaper alternatives.
If I was running Yahoo, I would quickly form a taskforce consisting of four specialized teams to attack the market from the underside: experience.
Viewer Experience – The first team, consists of mainly engineers and user experience experts, focuses on improving the quality of viewing and sharing experience beyond YouTube. A key attack vector is video quality. Using technologies like MotionDSP, viewer experience can be improve vastly. Another attack vector is video size.
Creator Experience – The second team, with similar make up as the first, focuses on improving the experience of content creators and submitters. Supporting wider selection of video source format and offering ease to use online video editing and management tools will attract content producers. Building a private P2P network will improve the uploading experience.
Advertiser Experience – The third team, consisting of advertising experts with help of engineers, focuses on making it easy for advertisers to target, track, and manage advertising campaigns.
Trendsetter Experience – The fourth team, consisting of marketing and social experts, focuses on creating new trends, to blitzkrieg for mindshare.
For example, I would create a cheap sturdy tapeless videocamera that uploads video clips directly to Yahoo video network then loan them out to selected teens across America for free. Seeding 1,000 yahoocams in each of the top US 20 cities and countrysides of all 50 states means 70,000 yahoocams are needed. At $300 a piece, the equipment cost is $21 million. Let's make that $40 million to account for extraneous costs. Compared to spending $1.6 billion, I think spending $40 million to let loose a horde of Yahoocam wielding teens roaming the whole country shooting video of whatever takes their fancy is worthwhile.
Now introduce rewards for good content. Let's call it video points or vips for short. Capturing a video of ongoing newsworthy event earns the videoshooter vips. Hotter the video is, more vips the shooter gets. Vips can be converted goods and can be used to compete for prizes of weekly or even daily contests, turning the whole thing into a game of sort.
The important thing is to think outside-the-box and to act boldly and timely. Yahoo has to launch the taskforce now to build anticipation while Google is busy integrating YouTube into its fold.