Apparently this death spiral took TWELVE YEARS (the WWW is 20 years old), and Yahoo is still #1 (or #2) in terms of total properties on the web. How is this a death spiral?"
By this reasoning MS still has the best OS (and OS engineers) in the world and everything is fine and dandy at MS. They still have 90 % of OS marketshare and Simon Peyton Jones works at MS Research and he works on Haskell and writes awesome papers. How could Microsoft be "dead" as PG claims in another essay ?
The key to this puzzle is that PG uses "death" in a figurative, not literal sense, to mean irrelevance, especially a fade to irrelevance from a previously dominant, direction setting, position not complete physical extinction.
If you prefer, read it as "irrelevance spiral" and you would at least be reacting to what he intended to say vs what you understood by some overly literal reading. "At Yahoo this irrelevance spiral started early" can still be rebutted, but it needs a serious argument to do so.
As he said in his "Microsoft is dead" essay.
"I already know what the reaction to this essay will be. Half the readers will say that Microsoft is still an enormously profitable company, and that I should be more careful about drawing conclusions based on what a few people think in our insular little "Web 2.0" bubble. The other half, the younger half, will complain that this is old news."
Replace Microsoft with Yahoo and this is what you are saying. MS has great market share, lots of smart researchers and many conferences for programmers using its technology and so on. All that doesn't avoid the fact that MS is a shadow of what it used to be in the nineties in terms of technological dominance.
Some of your other points have some merit (but their impact is lessened by your tone imho).
I am all for strong debate and argument (it enriches us all) and PG shouldn't be allowed to get away with sloppy thinking, but you have to show that the thinking is sloppy. And the first step in rebutting an argument is to understand what was really said.
As for whether Yahoo is really hacker friendly, the best way to find this out is to talk to some hackers who work (or have worked) at Yahoo. I am sure there are many people om HN who have worked/did work there. (strlen for example)
From his comment
"Much of the knowledge did diffuse to rest of the organization and it's important to note that along side the "dot-com-wannabe-millionaire-vesting-in-peace" crowd the essay describes, there was plenty of genuine technical talent (anyone who has worked there can attest to presence and influence of hackers).
Unfortunately, for many reasons, that talent has slowly bled out. There was also a great amount of friction between Search and rest of the organization e.g., resistance (by Search engineers) to dog-fooding of what was often inferior technology. Search was, however, able to maintain a different platform, remaining on Linux, with their own platform/software stack, but were some "wtf" moments like porting and forcing the adoption of a custom user space locking library from FreeBSD when Linux already had futex (on the other hand, the fact there was a custom locking library built in a "media company" does say something).
The other key mistake made is that they would position bright, capable new hires in areas that weren't directly correlated to revenue and treated as cost centers."
This sounds like a company making mistakes with respect to technology.
(EDIT: See also tailrecursion's comment on his experience when he cae to Yahoo from Inktomi http://news.ycombinator.com/item?id=1596797)
(These are just anecdotes and not made to argue a point)I have friends on the Yahoo search team and from what they tell me, they did get crushed in terms of search quality by Google and though they caught up later (though not completely), they could never recover the lost ground in marketshare.
I know someone who argued at an internal "strategy conference" that Yahoo needed to close the technology gap with Google or they would lose Search to Google and was completely ignored (He is still at Yahoo btw, though he switched to being a full time manager as a matter of survival).