WHEN Yahoo Inc. announced nearly five years ago that Terry S. Semel, then a former leader of the Warner Brothers motion picture studio, would become its chairman and chief executive, the reaction both outside and within Yahoo was not exactly one of wild encouragement.
Despite a hugely successful career running companies that make movies, television shows and music, Mr. Semel was immediately labeled an “old media” guy. Worse, he was a Hollywood guy, and had barely touched a computer during the nearly two decades he oversaw Warner Brothers with Robert A. Daly.
Even though he had been making private Internet investments since resigning from the studio two years earlier, when people associated “Semel” and “Yahoo,” they were more likely to think of an Australian comic named Yahoo Serious who starred in the 1988 Warner Brothers flop “Young Einstein.” Mr. Semel’s former boss at Time Warner, Gerald M. Levin, who had just completed his merger with America Online, laughed incredulously when he heard the news of Mr. Semel’s new gig in April 2001, according to an executive who was with Mr. Levin at the time.
At Yahoo, where the collapse of the dot-com bubble and the evaporation of online advertising had just helped sink the company’s market value from a peak of $127 billion to just $12.6 billion when he joined, the reception wasn’t much warmer. Mr. Semel, then 58, had neither geek cred like that of Yahoo’s co-founders, Jerry Yang and David Filo, nor Silicon Valley venture-capitalist swagger. Mr. Semel looked like a self-assured but unassuming guy who originally hailed from Queens, which he was. Word spread quickly in Yahoo’s headquarters in Sunnyvale, Calif., that — horrors! — he even wore a gold chain on his wrist. (This, too, was true, but the chain is not a fashion statement; it’s a medical bracelet for a shellfish allergy.)
The story line at Yahoo is much different today. Having lost $98 million on revenue of $717 million in the year when Mr. Semel joined it, Yahoo earned $1.2 billion last year on sales of $5.3 billion. With a market capitalization nudging $50 billion, it is worth roughly the same as the newly Pixar-ized Walt Disney Company or the combined value of the recently split Viacom and CBS.
Dollars aside, Yahoo has the widest global reach of any Internet site. It counts more than 420 million registered users around the world, and it owns the most-used e-mail, instant-messaging and music Web sites on the planet. In the United States alone, Yahoo attracted 103 million unique visitors in December, making it the country’s most-visited Web destination, according to Nielsen NetRatings.
“It’s a 21st-century media company,” Mr. Semel said in a recent interview. “The difference between the more traditional media companies and companies like Yahoo is all about technology, and the two — technology and media — totally marry each other.”
Not all marriages go as planned, of course. It is highly symbolic that Mr. Semel was recently in the office of Time Warner’s chief executive, Richard D. Parsons, proposing that Yahoo effectively take AOL off of Time Warner’s hands, although Mr. Parsons was not interested. Depending on how it handles the rapid and daunting rise of Google’s search-based juggernaut — not to mention Microsoft’s new determination to rule the Web — Yahoo has a shot at being the digital media company to beat.
IN the past two years, Mr. Semel has netted $403 million by exercising Yahoo options and selling shares. He still owns shares and options worth more than $230 million. The stock fell back last month amid concerns about whether Yahoo’s revenue can continue to grow by 30 percent or more a year. The old-media guys, most of whom light up cigars if they can hit double-digit earnings growth, wish they had his problems.
As he looks back over his five years running Yahoo, Mr. Semel makes no pretense of being a techno-guru, and he is often asked whether he really understands technology. “I’m never going to be a technologist, but I have to be conversant,” he said, adding: “I was never an actor or a director or a singer — I had to understand the process well enough to help make decisions.”
Although he has apartments in San Francisco and New York, home is still in the Bel Air section of Los Angeles. He commutes to Sunnyvale three or four days a week on the Gulfstream IV corporate jet that he and Mr. Daly bought from Warner Brothers when they resigned in 1999.
“Terry’s a thoughtful, intelligent man and he did not take his media imperialist roots to Sunnyvale,” said Barry Diller, the former Hollywood mogul who is now chairman and chief executive of IAC/InterActiveCorp. “And that’s what got him on the road to fluency, which he’s mastered. That’s some feat for an old-media dog, speaking as one who could be similarly described.”
To hear Mr. Semel describe it, the revival at Yahoo is attributable to the same methodical style and emphasis on team-building and consumer desires that allowed him and Mr. Daly to increase Warner Brothers’ revenue to more than $11 billion from less than $1 billion over nearly two decades.
But he concedes that there were unexpected contrasts between the old and the new that were not immediately apparent to him — just as they seem to keep confounding many of his old-media colleagues.
While all media rely on good content and distribution as underpinnings of their success, he said that the interactive world emphasizes qualities that the offline world doesn’t, including truly global reach, personalization and community. All media companies recite these concepts, but are heavily invested in and dependent on preserving existing relationships based on controlling both their content and the way it moves to people. What is more, they have not grown up in a world where technology can be as much of a competitive edge as hiring Steven Spielberg to direct a picture.
Perhaps the most glaring difference between Yahoo’s vision of a media company and the visions of more conventional media groups is in the definition of content. In a world of high-speed connections to a growing web of material that audiences can consume or manipulate in endless ways, Yahoo strives to be a 24/7 global blockbuster of self-expression. “Terry has said he’s been very clear about the fact that the habits and the desires of the consumer are the common theme between his last career and his current career,” Mr. Yang said.
By the time he was hired, Yahoo already had the foundation for success — most notably its number of worldwide users, more than 200 million, who did everything from checking business news and sports scores to sending e-mail and instant messages, listening to music and shopping.
But beyond the powerful brand and a company full of whizzes, there was no clear business strategy. The first thing Mr. Semel did was to streamline 44 business units into 4. That helped to set corporate priorities. “Terry’s relentless focus on focus is probably the most important thing we as a team or as a company are doing,” Mr. Yang said.
Mr. Semel’s first big decision — and probably his shrewdest — was to make advertising its mainstay business. At some of his earliest meetings at Yahoo, Mr. Semel recalled, some executives were advocating that the business instead pour its efforts into trying to extract monthly fees from its registered users.
“He was very early on in thinking, ‘if we can keep the users growing and we can keep growing usage, we will be able to monetize this and we will be able to create value,’ ” said Mary Meeker, the Internet analyst at Morgan Stanley. “It sounds like mom and apple pie, but that was something a lot of people did not get in 2001.”
Mr. Semel was also keen to develop other revenue streams, including music services, games and premium e-mail accounts. Its absence in the dial-up Internet access business, where AOL and Microsoft had pole positions, seemed, in those days, a glaring disadvantage. Mr. Semel addressed this with his second smart move: establishing a partnership with SBC, now AT&T, to sell Yahoo-brand high-speed connections over souped-up phone lines. Yahoo later added Verizon, British Telecom and Rogers Communications in Canada, and now has 9.6 million subscribers, according to Morgan Stanley estimates. Each subscription generates an average of $3 a month for Yahoo.
Vital to its focus on advertising was Yahoo’s decision, in 2003, to develop its own search business — built on the rapid-fire acquisitions of Inktomi and Overture, which itself had just bought AltaVista — to compete with Google. That freed Yahoo from having to license Google’s search technology. “We hardly went to sleep after we started to understand their business,” Mr. Semel said of Overture’s service of placing sponsored links alongside relevant search results. (Overture has been rechristened as Yahoo Search Marketing.)
Two years after introducing its own search engine, Yahoo trails only Google in that field. But it has also had to acknowledge that it is less effective than its rival at instantly matching relevant ads to search results. And Yahoo’s share of the search market slipped to 30 percent in December from 32 percent in the same month a year earlier, while Google’s share rose to 40 percent from 35 percent, according to ComScore Media Metrix. Improving the financial return on search advertising, Mr. Semel says, is in the works.
Although search represents only 5 percent of activity on the Web, this is no small matter: the higher profit margins generated by Google’s AdWords business are a big reason that Google’s $128 billion market capitalization now dwarfs Yahoo’s. (History will decide whether Google or, for that matter, Yahoo warrant their starry valuations in a market where the stocks of media companies with much higher revenues are being shunned by investors.)
Still, Mr. Semel contends that Yahoo’s ability to blend brand and search advertising will set it apart as the Web continues its swift evolution. Susan L. Decker, Yahoo’s finance chief, notes that most search advertisers are already online one way or another and tend to be small or midsized companies. But, she said, many major corporations are still spending only a small percentage of their marketing budgets online.
Without content that people want, of course, advertising is moot. Yahoo has gained attention in the past year for developing original programming, based out of a new Yahoo Media complex in Santa Monica, Calif.
Columnists have been hired for its news sites, reporters are hatching multimedia presentations and the inevitable online reality show is in the works. Yahoo wants to be the largest online video hub, streaming everything from news clips and movie trailers to Howard Stern stunts and NASA missions. Last year, it streamed four billion music videos, enough to fill the schedules of a lot of MTV channels.
Mr. Semel says he sees the company’s original content efforts as small steps toward figuring out what works on the Internet. But he and his colleagues are clearly more enamored of the prospects for distributing so-called old-media content. “Yahoo wants to create an environment where people can find all the content they want,” said Dan Rosensweig, Yahoo’s chief operating officer. “That’s why we’re going to be a great partner to the media companies.”
PARTNER, sure, but rival, too. Consider the News Corporation’s online moves, particularly its purchase of MySpace.com, a fast-growing social-networking Web site. The News Corporation intends for it to be the online equivalent of the early Fox network: an alternative that will draw young audiences from Yahoo and elsewhere.
More directly, America Online repositioned itself as a free portal last year, thus becoming a direct rival of Yahoo. “I think they’re going to be tough competitors going forward,” said Mr. Parsons, Time Warner’s chief executive. He added that he considered AOL’s portal competitive to Yahoo’s, but he acknowledged that Yahoo had a lead in several areas, including its reach overseas.
Mr. Semel and his Yahoo colleagues are most eager to encourage their registered users, who represent roughly 40 percent of the one billion people now online globally, to create their own content. Yahoo executives say that social networks, blogs, message boards and sites where users from around the world share material — like the recent Yahoo acquisitions Flickr, a photo-sharing business, and Del.icio.us, where people swap information on favorite Web sites and other things — are the keys to a fast-emerging media market.
Across Yahoo’s overflowing campus of purple cubicles in Sunnyvale, Calif., teams are working on a range of products — with names like Yahoo360, Y!Q, Yahoo Mindset, MyWeb 2.0 and Yahoo Answers — that use Web-searching as a ribbon for tying together virtual communities. MyWeb 2.0, for example, bills itself as a “social search engine” that lets users tag search results they may want to come back to and to share those results with cyberfriends.
At a media company like Warner Brothers, central factors for success include managing talent, financial acumen, guiding a “Batman” or a “Friends” to a debut and understanding how to market it. While many online efforts by media companies have focused on building direct and deeper connections with audiences, these have largely amounted to virtual fan clubs and stores for media brands and products.
Lately, Yahoo and other Internet companies have been enamored of the notion of connecting communities of people who, say, are fans of Batman but also share an affinity for mountain biking or Indian food. Thanks to new services intended to extend Yahoo’s network beyond computer screens to phones, TV’s and other gadgets, these communities can stay in constant contact.
Jeff Weiner, Yahoo’s senior vice president for search and marketplace, came up with the acronym FUSE to sum up Yahoo’s social networking ambitions: to “find, use, share and expand all human knowledge.” This sounds awfully high-minded for a company whose logo ends in an exclamation point, but it underscores another difference between old and new in a cynical age: “People come to work trying to change things,” Mr. Weiner said.
They also come to work knowing that the Internet is a field of dreams without barriers to entry. If you don’t build it, someone else will — most likely Google. Technology is what allows Yahoo to start these services and to tie them together on a global scale. “Almost from the first day I came to Yahoo,” Mr. Semel said, “I realized that every strategy we were considering had to be related to the quality of our technology.”
Farzad Nazem, a Yahoo veteran who is its chief technology officer, stressed that point. “Most of the old-media companies treat technology as an afterthought. It’s part of the execution, but it’s never part of the planning,” he said. “In the new world, it’s almost the reverse.”
AND it’s probably no surprise that, faced with the rapid rise of Google and growing competition from AOL and Microsoft’s MSN, Yahoo has been hiring engineers and opening research centers. Last year it added 220 people a month and now employs about 10,000.
“We try to present a consumer-friendly and, as much as possible, a humanized version of the Internet,” said Mr. Yang. “It’s fair to say we don’t go out and talk about ourselves as a tech company like Google or Microsoft. That is a very deliberate message we want to send out.”
It is a message that played to Mr. Semel’s strengths. Mr. Daly, the former Warner Brothers executive, remembers telling nay-sayers that they were wrong to underestimate his old friend:
“I told them, ‘You don’t understand Terry Semel. He knows what they need, and that is to bring a sense of not only leadership but marketing and how to put things together.’ At Yahoo, he is the father.”
