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[BUSINESS] Jerry Yang's Yahoo! Act Two with Terry Semel

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  • madchinaman
    Yahoo! Act Two After leading a gritty turnaround, CEO Terry Semel is thinking big. So is the competition
    Message 1 of 1 , May 23, 2003
      Yahoo! Act Two
      After leading a gritty turnaround, CEO Terry Semel is thinking big.
      So is the competition

      When Terry S. Semel walked into the Sunnyvale (Calif.) headquarters
      of Yahoo! (YHOO ) Inc. for his first day as chief executive on May
      1, 2001, he faced an unenviable task. Ad sales at the Internet icon
      were plummeting, and the new CEO was replacing the well-liked
      Timothy Koogle, who had been pushed aside by the company's board.
      Worse, leery employees quickly saw that Semel, a retired Hollywood
      exec, didn't know Internet technology and looked stiffly out of
      place at Yahoo's playful, egalitarian headquarters. Would this guy
      tour the Valley in the purple Yahoo car, as Koogle did, or play a
      Yahoo kazoo? Fat chance. And instead of bunking in nearby Atherton
      or Palo Alto, like other Silicon Valley execs, he rode off every
      evening in a chauffeured SUV to a luxury suite at San Francisco's
      Four Seasons Hotel.

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      Two years after taking control as chairman and CEO, Semel has
      silenced the doubters. By imposing his buttoned-down management
      approach on Yahoo, the 60-year-old has engineered one of the most
      remarkable revivals of a beleaguered dot-com. Once paralyzed by
      management gridlock and written off as another overhyped has-been,
      Yahoo is roaring back. The company earned $43 million on revenues of
      $953 million in 2002, compared with a $93 million loss in 2001 on
      $717 million in sales. And Yahoo's momentum is growing. Net income
      hit $47 million in this year's first quarter as revenues powered
      ahead 47%. Analysts predict that this year's profits will quadruple,
      to more than $200 million, while sales climb 33%, to $1.3
      billion. "What he has done is just phenomenal," says Hollywood pal
      Barry Diller, CEO of USA Interactive (USAI ) Inc., a Yahoo

      Semel has done nothing less than remake the culture of the
      quintessential Internet company. The new Yahoo is grounded by a host
      of Old Economy principles that Semel lugged up the coast from Los
      Angeles. The contrast with Yahoo's go-go days is stark. At Terry
      Semel's Yahoo, spontaneity is out. Order is in. New initiatives used
      to roll ahead following free-form brainstorming and a gut check.
      Now, they wind their way through a rugged gauntlet of tests and
      analysis. Only a few make the grade. It's a wrenching change. But
      Semel's self-effacing style, honed over years of navigating through
      the towering egos of Hollywood, helps soften the shock.

      Yahoo's newfound success does, too. Semel has used the dealmaking
      skills that made him a legend in the movie business to land crucial
      acquisitions and partnerships that are producing rich new revenues
      for Yahoo. A deal with phone giant SBC Communications (SBC ) Inc.
      launched Yahoo into the business of selling broadband access to
      millions of American homes -- which should add $70 million in
      revenue this year. The buyout of HotJobs.com (YHOO ) last year put
      Yahoo into the online job-hunting business, adding $80 million in
      revenue. Most important, a partnership with Overture Services
      (OVER ) Inc. to carry ads on Yahoo's search-results pages is gushing
      some $230 million in revenue this year. The upshot? Semel's new
      businesses should make up half of Yahoo's top line in 2003. "We
      planted a lot of seeds a year and a half ago, and some are beginning
      to grow," he says.

      Semel's strategy is gaining fans on Wall Street -- and stoking new
      fears of a mini-Internet bubble. The company's shares have soared
      200% in the past eight months, to $26. Sure, Yahoo's market
      capitalization is a mere 13% of its giddy all-time high of $127
      billion in early 2000. But today's price-earnings ratio of 79 is
      triple that of heavyweight Microsoft (MSFT ) Corp. and more than
      eBay (EBAY ) Inc.'s 67, despite the online auctioneer's heftier
      revenues, profits, and growth projections. "Yahoo's valuation is a
      tough case to make," concedes Firsthand Funds Chief Investment
      Officer Kevin Landis, who nonetheless has bought 50,000 Yahoo shares
      in the past eight months based on the portal's turnaround and
      brighter industry trends.

      Investors are betting on Semel to follow up his bold debut with a
      sizzling encore. Call it Act Two. For this next stage of growth,
      Semel envisions building Yahoo into a digital Disneyland, a souped-
      up theme park for the Internet Age. The idea is that Web surfers
      logging on to Yahoo's site, like customers squeezing through the
      turnstiles in Anaheim, will find themselves in a self-contained
      world full of irresistible offerings.

      In the past, Yahoo attracted visitors with free services such as
      stock quotes and headlines and drew 90% of its revenue from online
      ads. Now, Semel is trying to charge for many services, coaxing Web
      surfers to spend hard cash on everything from digital music and
      online games to job listings and premium e-mail accounts with loads
      of extra storage. Already, he pulls in one-third of revenue from
      such offerings and hopes to drive it up to 50% by 2004. To do that,
      analysts say, he's likely to cut deals to add online travel and
      classified ads for cars.

      But nothing is more key to Semel's strategy than his push into
      broadband. Lots of the services he's banking on, such as music and
      interactive games, are data hogs that appeal mostly to customers
      with high-speed links. Plus, broadband is always on, so many of
      Yahoo's customers will be lingering in Semel's theme park for hours
      on end, day after day. "The more time you spend on Yahoo, the more
      apt you are to sample both free and paid services," he says.

      If Semel can pull it off, the new Yahoo could become one of the few
      enduring powerhouses on the Net. Customers who pay for its services
      could more than triple, to 10 million in 2005 from 2.9 million now,
      analysts predict. Profits could soar 75% over the next two years, to
      $350 million, and sales could surge 30%, to $1.7 billion, analysts
      say. "Yahoo has emerged as a durable digital franchise," says
      Alberto W. Vilar, president of Amerindo Investment Advisors Inc.,
      which has an undisclosed stake. "If you take the long view, this
      stock could still double or triple."

      But Semel doesn't have a monopoly on digital theme parks. AOL Time
      Warner (AOL ) Inc. and Microsoft's MSN are pushing nearly identical
      agendas -- and both boast advantages over Yahoo. AOL, despite its
      merger headaches, can tap into popular content from the world's
      largest media company, from CNN to Warner Music. MSN benefits from
      the software muscle and cash hoard of Microsoft, as well as
      broadband partnerships that cover 27% more lines into homes and
      businesses than Yahoo's SBC deal. It also may have an easier time
      getting Web surfers to pay for new offerings. "Yahoo's brand is
      built on free information services," says MSN Group Product Manager
      Lisa Gurry. She says coaxing Yahoo customers to pull out their
      wallets will be "very challenging."

      An even greater challenge is coming from a newer competitor, Google
      Inc. In just four years, Google has turned into a global sensation
      and is now widely regarded as the preeminent search engine on earth.
      The risk to Yahoo is that the search king will give birth to a more
      potent business model. Instead of flocking to flashy theme parks
      such as Yahoo's, consumers are already starting to rely on Google's
      uncluttered search to find everything they need. Already, some
      online advertisers are moving their ad dollars to search
      engines. "We're shifting our emphasis away from portals [such as
      Yahoo, AOL, and MSN]," says Alan Rimm-Kaufman, vice-president for
      marketing at electronics retailer Crutchfield Corp. "The people
      stealing these ad dollars are [companies] like Google."

      Hot competition in the search business could force Semel's next big
      move. His partnership with Overture, a company that delivers
      Internet advertising, is producing some 20% of Yahoo's revenues.
      Microsoft's MSN has a similar deal with Overture that also is paying
      off richly. Analysts say Semel could make an offer for Overture --
      if he thinks it's necessary to preempt a Microsoft acquisition. He
      is already sitting on $2.2 billion in cash, 50% more than the likely
      price tag for Overture. Still, Semel likely won't make a bid unless
      he's pushed into it because of the distractions of such a large
      merger. Yahoo and Overture declined comment on a possible deal.

      Distraction is something Yahoo can ill afford as it adapts to the
      changes ahead. To date, Semel has honed the company's execution --
      cutting costs, filtering out iffy ideas, pursuing sure things, and
      making money. It's the perfect model for today's sickly market. But
      when the slump ends, new ideas will likely make a dramatic comeback.
      These could define the next generation of the Internet. The question
      is whether Yahoo, with its careful and laborious vetting process for
      new projects, risks losing out to Google or getting blindsided by a
      nimble newcomer.

      Can Semel innovate, beat back the rising tide of competition, and
      live up to the latest round of great expectations for Yahoo? If he
      plays his cards right, yes. Despite the advantages of AOL and MSN,
      Yahoo has kept its position as the most popular site on the Web,
      according to Nielsen/Net Ratings. Yahoo claims 232 million monthly
      visitors. Semel is demonstrating the skills to turn this large chunk
      of humanity into paying customers, boosting the customer count
      eightfold, from 375,000 when he arrived two years ago. To combat
      Google, Semel is hurrying to beef up Yahoo's search capabilities. He
      closed a $290 million deal for search company Inktomi (YHOO ) in
      March, and the marketing campaign to promote it blasted off in New
      York's Times Square on May 19. "Yahoo has reemerged as a potent
      force," says Derek Brown, an analyst at Pacific Growth
      Equities. "It's well-positioned to leverage its massive global user
      base and dominant brand."

      The CEO's low-key approach has worked quiet magic through a 40-year
      career. When Brooklyn-born Semel arrived as a sales trainee at
      Warner Bros. in 1965, the 22-year-old accountant had little relevant
      experience but an understated confidence in himself. In an industry
      brimming with ego, Semel stayed offstage and worked to shine the
      light on others. It paid dividends. As he moved from Warner Bros. to
      Buena Vista and back again, Semel rose to the top on a vast network
      of friends and allies. He used these, along with his formidable
      negotiating skills, to create a giant. In a two-decade partnership
      as co-CEO with Bob Daly, Semel turned Warner Bros. from a $1 billion
      studio to an $11 billion behemoth, producing megahits such as The

      Through his retirement in 1999, Semel kept up the winning formula,
      making friends and minting millions. He says that in their two
      decades together, he and Daly never fought. If such a smooth track
      record is rare in high tech, it's even more uncommon in
      Hollywood. "When you're releasing 20 or 25 movies a year, you're
      navigating a minefield every weekend," says Barry M. Meyer, chairman
      and CEO of Warner Bros. Entertainment Inc. and a longtime Semel
      colleague. "His success at Yahoo does not surprise me at all."

      It was Yahoo co-founder Jerry Yang who nudged Semel toward Yahoo in
      2001. The two had met two years earlier at a media conference and
      had hit it off. By the spring of 2001, Yahoo was reeling from the
      falloff in Net advertising and needed a major overhaul. The question
      was whether the wealthy Semel, who was already dabbling in online
      entertainment companies, would dive into one of the biggest of them
      all at a time of crisis. Semel signed on with the proviso that
      Koogle step down as chairman.

      When the new chief arrived, he ran into a few troubling surprises.
      Semel was shocked early on to learn that Yahoo did not have the
      technology in place to handle surging demand for services such as
      online personals, say two former executives. That spelled months of
      delay before Semel could push premium offerings.

      Then there were the cultural challenges. Initially, Semel balked at
      the company's "cubicles only" policy, finally settling into a cube
      adjacent to a conference room so he could make phone calls in
      private. He stayed free of the Valley social scene, spending
      weeknights at the hotel in San Francisco and flying his private jet
      home to his swanky Los Angeles neighborhood of Bel Air on weekends.

      Morale was also an issue. Compared with his predecessor, the relaxed
      and chatty Koogle, known by the troops as T.K., Semel came off at
      first as cold and rough. He chopped down the 44 business units he
      inherited to 5, stripping many execs of pet projects. Veteran Yahoo
      execs prodded Semel to mingle more with the rank and file and pushed
      him into grabbing lunch more often at the campus cafeteria. Still,
      such forays often fell flat. "T.K. was just one of the guys," says a
      former Yahoo manager. "When Semel talked to you, it felt like he was
      consciously making an effort to talk to employees."

      Soon, Semel's strengths started to shine through. With his focus and
      dealmaking savvy, he appeared to have the tools to rescue Yahoo.
      Employees, with loads of underwater stock options, increasingly
      cheered him on. "People don't always agree with the direction
      they're getting, but they're happy the direction is there," says a
      current Yahoo manager who requested anonymity.

      Walk through Yahoo's headquarters, past the purple cow in the lobby,
      the acres of cubicles, the workers in jeans, and you might think
      T.K. was still running the place. But sitting across from Semel, the
      change is evident. His voice quiet and steady, his language cordial
      yet deliberate, Semel seems incapable of the hype that once vaulted
      companies such as Yahoo into the stratosphere. This is the voice of
      the post-dot-com era. He steers attention to his colleagues. "I love
      [my managers] to do their homework," he says. "I love them to help
      make decisions, and they do. Somewhere in that process, I'll include
      myself -- or they'll include me."

      Semel's not kidding about the homework. In the old days, Yahoo execs
      would brainstorm for hours, often following hunches with new
      initiatives. Those days are long gone. Under Semel, managers must
      prepare exhaustively before bringing up a new idea if it's to have a
      chance to survive.

      It's a Darwinian drama that takes place in near-weekly meetings of a
      group called the Product Council. Dreamed up by a couple of vice-
      presidents and championed by Semel and his chief operating officer,
      Daniel Rosensweig, a former president of CNET Networks (CNET ) Inc.,
      the group typically includes nine managers from all corners of the
      company. It's chaired by Geoff Ralston and often includes key
      lieutenants such as Jeff Weiner and Jim Brock, all senior vice-
      presidents. The group sizes up business plans to make sure all new
      projects bring benefits to Yahoo's existing businesses. "We need to
      work within a framework," says Semel. "If it's a free-for-all...we
      won't take advantage of the strengths of our company."

      For years, managers built up their own niches around the main Yahoo
      site. No one, say former and current execs, appeared to be thinking
      about the portal as a whole, much less how the various bits and
      pieces could work together. "Managers would beg, borrow, and steal
      from the network to help their own properties," says Greg Coleman,
      Yahoo's executive vice-president for media and sales.

      Semel wants to stitch it all together. He calls the concept "network
      optimization" and says it's a key goal for 2003. The idea is that
      every initiative should not only make money but also feed Yahoo's
      other businesses. It's the painstaking job of establishing these
      interconnections that eats up much of the time at council meetings.
      And the winnowing process is brutal. Of the 79 current ideas for
      premium services at some stage of planning inside Yahoo, only a few
      will launch in 2003, predicts Rosensweig.

      Although some critics worry that innovative ideas may never see the
      light of day under Semel's tight control, he dismisses the prospect.
      Semel stresses instead the potential payoff: less clutter and a
      handful of high-performance services that feed each other. For a
      success story, he points to the company's recently relaunched search
      capabilities. Search for "pizza" and type in your area code, and
      Yahoo culls its Yellow Pages site to return addresses and driving
      maps to nearby pizza joints. Yahoo is the only heavyweight portal
      that integrates content this deeply with its search features.

      Such smart execution was in dangerously short supply at Yahoo in the
      past. At the height of the Net bubble, Yahoo came off as arrogant.
      Its attitude, recalls Jeff Bell, a marketing vice-president at
      DaimlerChrysler (DCX ) Corp., was "Buy our stuff, and shut up."
      Semel has turned that around, hiring traditional media sales
      veterans and introducing more flexibility. The payoff: As the online
      ad market has recovered, advertisers are flocking back to Yahoo.
      Daimler's Bell says his Yahoo ad budget has doubled over the past
      two years.

      Entertainment companies are joining the rush to buy key Yahoo ad
      space. Some 42 movies advertised on Yahoo in the first quarter, up
      from zilch in the first quarter of 2001. "Getting a presence on
      Yahoo's home page is huge," says Sarah Beatty, a senior marketing
      vice-president at USA Network, which is running seven ad campaigns
      on Yahoo in 2003.

      Semel has supplemented Yahoo's ad revenues with dealmaking in other
      businesses. Consider the SBC pact to market broadband Net access.
      SBC pays Yahoo about $5 out of the $40 to $60 customers pay each
      month for service. Revenues from the deal should jump from $70
      million this year to $125 million in 2004.

      Still, Yahoo remains vulnerable in broadband. MSN has cut similar
      deals with Verizon (VZ ) Communications and Qwest Communications
      (Q ) International Inc., which have 75 million lines to homes and
      businesses, vs. SBC's 59 million. Semel's efforts to land other
      broadband deals have come up short. More worrisome is the fragile
      nature of these partnerships. If SBC concludes that the Yahoo brand
      isn't a big draw, it could cut Yahoo out and save itself millions.
      An SBC spokesman says it is "happy" with Yahoo.

      Of all Semel's deals, none shines brighter than the partnership with
      Overture Services. The companies team up to sell ads near Yahoo's
      search results, a business known as "paid search." If a user
      searches for "cookware," for instance, advertisers from Macy's (FD )
      to Sur La Table can bid to showcase their links near the results.
      Overture delivers the advertisers and forks over roughly two-thirds
      of the revenue. While Yahoo had debated such a partnership for years
      under Koogle, Semel drove it through in a hurry.

      Just in time for paid search to blossom into the latest Web
      sensation. The partnership notched Yahoo more than $130 million in
      revenues last year -- 14% of its business. Analysts expect revenues
      from the partnership to increase 75% in 2003, accounting for nearly
      20% of Yahoo's revenues.

      That assumes that Google won't spoil Yahoo's fun. The wildly popular
      search engine has emerged as the fourth-most-trafficked site on the
      Internet, with an estimated $700 million in 2003 revenues. And the
      world may be heading Google's way. Industry analysts say that as Web
      surfers gain expertise, they visit general-interest sites such as
      Yahoo less and instead cut to the chase by typing in keywords on a
      search engine. According to analytics firm WebSideStory, the
      percentage of Web site visitors arriving via search engines doubled
      in the past year, to 13%.

      Google's strength puts Semel in a bind. He licenses Google's search
      engine, which is popular among Yahoo's users. Trouble is, by keeping
      Google on Yahoo, he publicly endorses a rival. His likely goal, say
      analysts, is to replace Google soon with Inktomi, the search engine
      he acquired in March. That would save $13 million a year in
      licensing and pull the plug on Yahoo's apparent backing of Google.
      The danger? If Yahoo's Google-loving customers balk at switching to
      Inktomi, they could ditch Yahoo and surf straight to the Google site.

      His answer is a national marketing campaign to boost Yahoo as a
      search brand. It kicked off on May 19 in New York's Times Square
      with the unveiling of a huge computer-screen ad featuring live
      searches on the Yahoo site. At street level in New York, teams of
      Yahoo's costumed "searchers" paraded among the crowds waving five-
      foot-long search bars.

      It's all part of the growing buzz at Yahoo. Using his mix of
      discipline, sales, and dealmaking, Terry Semel has pulled off a
      stunning revival. But can he pull off Act Two and build Yahoo into
      the digital theme park of his dreams? If he does, Semel will be one
      of the biggest winners: When he took the helm, he bought 1 million
      shares of Yahoo at $17 apiece. Those shares are up 60%. The fact
      that Yahoo shares are banging on the ceiling and not the floor is a
      vivid sign that Semel's turnaround may be just getting started.

      By Ben Elgin in Sunnyvale, Calif., with Ronald Grover in Los Angeles
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