Terry Semel Thinks Yahoo Should Grow Up Already
That means going broadband and taking on AOL and MSN. Lots of luck.
Sunday, September 15, 2002
By Daniel Roth
For almost three years Ted Meisel's calls to Yahoo went unanswered. As CEO of GoTo.com--now called Overture--Meisel knew that Yahoo could make money by using his pay-for-placement search offerings. Companies were lapping up the service, which lets, say, findaplumber.com pop to the top when a user searches for "leak" or "clogged toilet" or "plumber." But with dot-com advertisers lining up to get a spot on Yahoo, the company hardly needed to field unsolicited pitches. "It wasn't something that they were willing to make time for," says Meisel.
Then last fall an odd thing happened: Yahoo called in Meisel for a test run. Within three months Overture was placing its listings on Yahoo, and by April the two companies had inked a three-year deal. By early this summer the partnership was responsible for an estimated 10% of Yahoo's $226 million in second-quarter revenues--all with Yahoo's barely lifting a finger or spending a dime.
So it's no surprise why Yahoo did the deal: The listings are a rare bright spot in another year of advertising malaise. One question: Why didn't Yahoo do this earlier?
The answer, says Yahoo CEO Terry Semel, has a lot to do with Yahoo's vision of itself during the bubble. "In addition to doing a lot of great things, Yahoo had a sense of arrogance, of we-invented-this," he says, fiddling with his silver-rimmed glasses. "If we are going to succeed, we have to have people with different attitudes."
This is Terry Semel's Yahoo. In the past 16 months the former Warner Bros. chief has remade the embattled portal in his image: It's humbler, quieter, and more willing to play with others when it has to tackle what it doesn't know. Much of the new demeanor has come through the business equivalent of regime change: Of Semel's 18 top executives, almost half have arrived since his watch began in May 2001. Those eight execs bring distinctly old-media backgrounds--the head of advertising sales is a 25-year publishing veteran; the head of global marketing is one of the people responsible for turning around Sears; the COO is the former head of tech media publisher ZDNet. Then there's Semel, who over 21 years--first as COO, then as co-CEO--built Warner Bros. from a $750 million studio to an $11 billion mammoth before stepping down in 1999. "This is a classic example of bringing the adults in to mind the children," says UBS Warburg analyst Christopher Dixon.
And what the adults know, or believe they know, is that in the real world people will actually pay for things they find useful. So small businesses will shell out to be listed in a separate area at the top of Yahoo's website, the top search destination on the Net. Employers will pay to find good job candidates--something Yahoo learned by buying No. 2 career site HotJobs.com for $436 million in February. And users--grudgingly--will fork over cash for better versions of services they're accustomed to getting free. To date, one million Yahoos have subscribed to at least one of the portal's 20 new or expanded premium add-ons (see chart, Playing in the Fast Lane), which range from a mail-forwarding service to an online play space for private bridge games. Those users are a tiny fraction of the 238 million surfers who visited Yahoo last quarter, but they're a million more than Yahoo had before. "Every dollar that comes in from any premium service is incremental to us," says Semel. "Last year we had zero. Literally."
Together, Semel's changes have righted what was a badly listing company. After six quarters in the red, Yahoo reported a profit in the quarter ended June 30, posting net income of $21.4 million. Thanks largely to the Overture pact and the HotJobs deal, Semel not only pushed up sales by 24% from the same quarter a year ago but also began to wean Yahoo from sickly Madison Avenue. In 2000 nearly 90% of Yahoo's revenues came from advertising; in the June quarter that figure was 60%.
Wall Street's reaction? A big yawn. Yahoo's stock now trades at about $10.50, not far from its all-time low last September of $8.11 and light-years from its $237.50 bubble high in 2000. While investors have politely clapped at most of Semel's moves, they're still skeptical that he can progress from stabilizing the company to actually making it thrive. "Semel's managed the downturn pretty well," says James Preissler, director of digital media research at Investec. "But where I wouldn't give them good marks is building the future of the company. We basically have Yahoo from two years ago with some new stuff."
In a few weeks that should change. Semel is making a big bet that broadband will convert Yahoo users from free riders to subscribers. In late September, Yahoo is expected to roll out a high-speed Internet service in partnership with Baby Bell SBC. For about $50 a month, users who sign up for DSL service in SBC's 13 states will get a special Yahoo browser, 125 megabytes of e-mail storage, and the chance to see whether Yahoo is actually worth more than they're currently paying: nothing. For Semel, the real test starts here. "This will be the foundation for the company's entry into the broader world of subscription services," says Jim Brock, Yahoo's senior vice president of major initiatives, who's overseeing the launch. "This is our flagship product."
The plan works like this: SBC will mail customers who order DSL service a purple-and-blue box containing a modem and a CD-ROM with Yahoo's web software. In about 30 minutes, users will be up and running with a browser that looks like the love child of MyYahoo and Internet Explorer. Once signed on, the experience is all Yahoo. Users can check their e-mail through Yahoo Mail and customize every inch of their screen with special Yahoo content. One corner of the screen will house a user's three most recent messages, another a personalized news feed, another sports scores of favorite teams, another a radio station playing music the user likes. The system learns too. The more you listen to the radio, the more it knows what sort of songs you like. If you click on sports news a lot, Yahoo will feed more team reports to the front page.
Under the terms of the deal, SBC will pay Yahoo an estimated $5 a month for each subscriber; Yahoo, in return, will give SBC an undisclosed percentage of any premium services subscribers purchase beyond the basic package, like real-time stock quotes or expanded e-mail storage. If it all works out, Soundview Technology analyst Jordan Rohan thinks DSL subscriber fees will account for about 5% of Yahoo's expected $1.2 billion in 2003 sales and 30% of its growth.
Integrated e-mail, a customized browser, a push toward buying stuff, a helping hand on the Net--this sounds more than a little like AOL and Microsoft's MSN. And that's where Semel's strategy gets really risky. For years Yahoo competed with AOL and Microsoft only for ad dollars; now the company wants to be a full-fledged ISP and go head-to-head against its wealthy rivals for subscribers.
The fight is likely to be vicious. Both AOL and MSN see broadband as the key to their future, and this fall both will release new versions of their service designed to deliver much the same things as Yahoo's DSL offering: richer media, better mail controls, and advanced instant messaging. And while Yahoo today has access only to SBC's 26 million DSL-ready homes and businesses, MSN has agreements with Verizon and Qwest, putting it within reach of some 38 million. AOL, for its part, can tap into the 20 million households in its Time Warner Cable unit service area and, with an agreement signed in August, into the 27.6 million homes in the merged AT&T Broadband and Comcast service area. For AOL and Microsoft, Yahoo is merely a nuisance. "Yahoo's a novice when it comes to delivering software services," says Lisa Gurry, MSN's lead product manager. "We've been in this game for five years now. We've learned a lot of hard lessons." Gurry sees her real foe as AOL. Where is Yahoo on Microsoft's radar? "Far, far off."
Yet how well Yahoo does in broadband may be the real test of Semel's strategy, and his biggest gamble. As WBS Warburg analyst Dixon says, "This is the real battle front over the next 15 months."
On a beautiful late-August morning, Semel is delivering a message he has repeated often since he arrived at Yahoo: The company has a long way to go. He is giving the sermon to Jerry Yang, the 33-year-old creator of Yahoo, and it is slightly discomfiting to see the golden boy of the golden age of the Internet taken to task, no matter how gently. And Semel, 59, is trying to do the job very, very gently.
The two are in a conference room next to Semel's cubicle, sitting cater-cornered from each other in identical purple chairs. "Jerry, I say that everything you guys did as a startup company was brilliant in the climate that existed up to that point in time--how to grow as fast and as wide as possible with the business of advertising to support it," says Semel. Yang listens and leans back in his chair. Semel continues: "But times change; companies change. The company had to diversify, and in order to diversify--to start building business--you have to have focus."
That could be Yang's turn to get defensive. Instead he nods. This is the kind of advice he wanted when he helped pick Semel to replace Tim Koogle, Yahoo's former CEO. Koogle was known for his consensus style of management, which is one reason Yahoo found itself adrift early last year and in need of someone who was willing to make decisions. Yang met Semel at Herb Allen's Sun Valley media conference in 1999, and the two had half-a-dozen lunches to talk about the old and new media worlds. When Koogle resigned in April 2001, Semel was on the list to replace him. After 40 days of combing through 100 candidates, Yang and the board of directors decided that the Brooklyn native would be the perfect fit.
To the outside world, Semel and Yahoo seemed like anything but an ideal match. The press painted Semel as a pool-lounging, star-cosseting mogul, soon to be lost in a world of pocket protectors and Linux freaks. "Stranger in a strange land," declared Premiere magazine.
But the stereotype was as poorly applied to Semel as it was to the Valley. Semel still speaks with a very unposh accent--"easier" comes out "easiuh." He keeps his hair gray at the edges, and he doesn't name-drop or, more surprisingly, backstab. He talks slowly, saying what's on his mind, then stops when the thought is complete. "Before coming, I kept reading about this guy from Hollywood. I guess that was me," says Semel. "But this guy from Hollywood was also a business person who ran a worldwide set of media assets. When I first got to Warner Bros., [co-CEO] Bob Daly and I faced many of the same opportunities and problems as Yahoo. We had a company with a great brand, and many aspects of the company were really broken, but there were great opportunities."
After arriving, Semel set aside much of each day for meetings--more casting call than coffee klatch--with the heads of Yahoo's 44 business units. They were expected to come in one by one with a detailed explanation of what they did, how it was good for Yahoo, and why it was essential to continue. Semel would sit and listen, ask a few questions, and the meeting would be over. That went on for almost three months--an eternity for a company used to moving at Internet speed. But Semel refused to play by Valley rules. Heck, he didn't even want to live there. Every weekend Semel commuted back to Southern California in his Gulfstream.
By November, Semel had streamlined the 44 units into six groups (seven now, with HotJobs). Then he took steps to corral Yahoo's old way of growing, which seemed to involve saying yes to any deal any manager liked. "I couldn't get my arms around something that had so many pieces and so many people running so many things, large and small," explains Semel. "There was no specific strategy, no specific point of view."
Yahoo employees who want to pitch deals now have to answer some basic questions: How does the deal affect the brand? How does it tie into the broadband business? What sort of customer support will the product need? "Yahoo's original mission was to grow as fast as you can and put things out there and see what works," says COO Dan Rosensweig, who ran CNET and ZDNet before coming to Yahoo in April. "Nobody knew what would work. Now you have a much better indication of what makes sense."
Semel also made sure that employees understood Yahoo would no longer be going it alone. After signing the deal with SBC last November to roll out DSL, Semel assigned 30 people to work with SBC full-time. For 45 days--straight through Thanksgiving and into Christmas--those Yahooers flew down to SBC's Dallas office, held meetings in Sunnyvale, and conducted talks over speakerphone, finalizing the operating plan for how the service would roll out. "This is being married to each other, not just participating in some form or fashion and competing in others," says Ray Wilkins, SBC's group president of sales and marketing.
Marriage is a fine institution, but can it help drag Yahoo's stock out of the gutter? The company is in a tough position: Its stock already trades at 50 times expected 2003 earnings; AOL, by contrast, trades at 14 and Microsoft at 23. Still, the stock is unlikely to fall much further. Justin Baldauf, an analyst at Merrill Lynch, argues that the company's nonoperating assets alone are worth close to $6 a share, principally cash and short-term investments and a 34% stake in Yahoo Japan. He thinks the company is likely to hover around $10 until Yahoo can show the market that its strategy will work.
For that to happen, Yahoo will have to convince users that its services are worth paying for, especially after it moves into broadband. "We're not the size of the other corporations," says Semel. "This is going to come down to: How good are you at services? How well do you communicate with your customers? We have a superb opportunity to be No. 1."
Maybe. Yet broadband, in its short history, has served as a white whale to plenty of Ahabs. NBC's Internet group, NBCi, died while trying to be a broadband portal; Excite@Home perished in internecine cable industry warfare; and an early Yahoo streaming-media experiment, a CNBC wannabe called FinanceVision, was axed earlier this year. They were all launched at a time when investors were willing to accept a few mistakes. Semel's quieter, more focused Yahoo needs to get it right. These days investors aren't tolerant at all.