[BUSINESS] Jerry Yang's Yahoo! Act Two with Terry Semel
- 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.
Content Continues Below Ad
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
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
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