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In the fat, happy days of the late 1990s, Yahoo was the Don Quixote of the Internet, blithely rushing at every opportunity it encountered. Employees came up with new ideas (such as offering driving directions and games online), and the company merrily added them to the site--free of charge. Today a group of Yahoo execs, sternly dubbed the "Product Council," meets twice a month to consider new business ideas, but their reactions more closely resemble the Simon treatment on "American Idol" than Quixote. Last year dozens of ideas were brought to the council, but only a handful were implemented--like a Web hosting service for small businesses--and each new product requires that users pay for it.
Yahoo was the signature company of the dot-com bubble, and the exclamation point on the end of its logo captured the insouciant spirit of the day. Along the way, the firm managed to earn a stock-market valuation larger than Disney's. Today it's worth a slim 8 percent of its former self, and the exclamation point has, in spirit at least, been replaced by a far more modest but definitive period. By offering new paid services, hooking up with telcos and charging companies to buy special listings on the prime real estate of its search page, Yahoo has become a case study in how dot-coms might actually make real money this decade. Last month it announced its third straight quarter of profitability.
For all this, you can credit Yahoo's Brooklyn-bred CEO, Terry Semel. Two years ago the longtime Warner Brothers movie and music chief swam upstream from L.A. to Silicon Valley, where he needed advice on when to wear a tie. Rather than forever chasing the Next New Thing, Semel, 59, offered the company a gray-haired business lesson: that the next new thing could be a Series of Little Things--paid offerings like extra e-mail storage and full access to Yahoo's personal listings, along with fiscal discipline and a lean payroll. Semel has been working his turnaround quietly, as AOL Time Warner has conducted a very public search for a money-making strategy, and super-search engine Google has become the media darling.
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Semel was lured north by 34-year-old Yahoo founder Jerry Yang, who needed help saving a company reeling after the sudden evaporation of $400 million in advertising from defunct dot-coms. A multimillionaire with his own Gulfstream jet, Semel didn't need to work but was intrigued by the challenge. The Yahoo he inherited was "a one-trick pony," a business wholly dependent on ad banners. He laid off 400 employees, acquired HotJobs.com--an unsexy career site that's turned out to be a handy asset in an age of widespread job uncertainty--and forged a relationship with telco SBC Communications to make Yahoo the home page for customers using the Baby Bell's dial-up and broadband offerings.
Semel also found that Yahoo's most promising moneymaker had been under the company's nose all along: search. Founders Yang and David Filo originally created Yahoo in 1994 to allow Internet users to easily find things on the Web. Later, concentrating on becoming an all-encompassing "Web portal," they licensed other computer-run search engines to augment their own directory, which was assembled by employees. But the computer-powered search engines like Google turned out to be the best way to catalog the exploding digital universe. In December, Semel finally changed directions by forking out $235 million to buy Google's chief rival, Inktomi. Semel also saw a way to marry searches and banner ads, by getting companies to pay for space alongside computer-generated listings. Over the protests of Yahoo old-timers who thought it would alienate customers, Yahoo started selling space on search pages to advertisers a year ago, and the move has since delivered more than $70 million to the company.
For the past two years Semel has laid low, and for good reason. One quarter of profitability can be a fluke; two in a row, a coincidence. But three is a trend, so last week Semel and his buoyant team hosted a group of Wall Street analysts at their Santa Clara headquarters. Semel spoke confidently about the turnaround--even when his slide presentation went kaput in mid-speech. Like his rivals at MSN and AOL, he talked about bringing in more money with "premium services," functions that go beyond what Yahoo currently offers for free. In a demonstration for the analysts, Jerry Yang offered a peek at a new service, coming later this year, called Yahoo Platinum, where users will be required to pay to watch sports and behind-the-scenes clips from TV shows.
Analysts are skeptical that the Web portals can turn themselves into something resembling HBO on the Net. "It's promising but at this point, its only a niche market," says US Bancorp Piper Jaffray analyst Safa Rashtchy. An executive at the Seattle-based Real Networks, currently the leader in this field with exclusive deals to broadcast NBA and MLB games on the Net, says of Yahoo Platinum, "Mimicry is flattery." But Semel thinks there's room for plenty of competitors in that market--like the many different networks on TV. He also promises he's not going to bet the farm on such offerings. "We're going to put our toe in the water [with new premium services]. We don't know yet if it's a killer application," he says.
As for Semel himself, after two years, he might finally be getting the hang of those strange Silicon Valley customs. He's begun occasionally taking his shoes off in meetings, colleagues say, and has started to casually mention the long hours he works--a customary habit of Valley business folk. He dismisses press reports from last year that said he was clashing with the free-spirited Yahoo culture. ("If I didn't like the culture here, I would have changed it," he says.) But he admits he's not quite part of the local Valley business scene yet. He still commutes every day from his suite at the Four Seasons Hotel in San Francisco, and returns for the weekends on his jet to L.A., where his family still lives. It's an odd, dual-city existence for a Silicon Valley CEO. But as long as Terry Semel continues to push the classic Internet company along the road to recovery, he'll remain Yahoo's knight errant.
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