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Online Extra: Behind Yahoo's Breakout


Judging from Yahoo!'s (YHOO) scintillating performance over the past three years, one might think Chief Operating Officer Dan Rosensweig is either very lucky or tremendously skilled. In fact, it's a bit of both.

One of CEO Terry Semel's first major hires, Rosensweig came from CNET Networks (CNET) in 2002 to spearhead Yahoo's operations. The Internet giant had slipped badly in 2001, posting red ink and a steep drop in sales. Since that time, however, Yahoo's aggregate revenues have more than quadrupled, to $3.6 billion, and its market valuation has more than tripled, to $43 billion. Profits reached $840 million in 2004.

Sure, the rejuvenated market for Internet ads contributed mightily to Yahoo's turnaround. But the management team, led by Rosensweig, Semel, and Chief Financial Officer Susan Decker, has achieved significant internal changes, from the way Yahoo hatches products to how it stitches acquisitions into the organization's fabric. As a result, it has stayed near the pinnacle of the booming Internet industry.

Ben Elgin, a BusinessWeek Silicon Valley correspondent, recently caught up with Rosensweig in between board meetings for a brief conversation. Here are edited excerpts:

Q: Over the past three years, Yahoo's stock has gone up 346%. Sales are up fourfold. How do you maintain this pace?

A: We've seen acceleration in many areas of our business. There are emerging opportunities within the businesses we're in and within countries where we can be bigger and better. Our business model of advertising and premium services has excellent margins and great leverage. We've seen margin expansion. Our user base keeps growing. The engagement we have with users keeps growing. We're growing market share in all usage categories.

We think the business model we're in is "very early days." We still think Internet advertising gets 3% [of total ad dollars], when the eyeballs are 15% to 20% [of total media consumption] in the U.S. alone. And we're seeing the expansion of these models outside the U.S., in Europe and into Asia. We have very strong positions in Asia and very strong positions in places in Europe.

Q: In 2004, international sales growth far outpaced U.S. sales growth for the first time. What triggered this?

A: When we got to the company, job one was to fix it. We focused on our strongest and most important market, which is the U.S. It also turned out that models that we're in, online premium services and advertising, were more robust in the U.S. By building great products for the consumer, we knew that the models would ultimately work. We saw that in the U.S. And now we're beginning to see that around the world.

Q: Some observers credit market forces at least as much as management for Yahoo's turnaround. What are one or two operational changes that have precipitated success at Yahoo and may not be widely known?

A: We focused on what it really takes to be successful in these businesses. And we said the most important thing is the consumer. We took everything we had, and we said, "How can we be essential to your lives? What value can we bring to your lives? How can we make our products better, faster, easier, more valuable for the benefit of our users?" Operationally, we focused on making sure we put consumers first. Great products equal a great business.

[In addition], we hire top talent. How do we get the best people in the world to do that? We created an environment where the best want to come to Yahoo. Whether they're engineers, product people, designers, ad-sales people, marketing people, direct marketing people.

We created a framework people can understand, including how you measure success. Make it measurable. Get great people to do it. Give them the opportunity to be successful. Those are things that don't happen by accident. It's a systematic plan. And Yahoo doesn't get enough credit for that.

Q: Yahoo has been exploring ways to distribute unique content, such as your partnership to show unaired footage of the Apprentice. What will be Yahoo's role in content creation going forward?

A: We're really in the business of aggregating large, really valuable audiences who find enormous and increasing value in Yahoo. Content is obviously one of our key pillars. Within the content spectrum, there is everything from user-generated content to if we were to create our own. We think the next big move in content is user-generated content, community-based content.

In terms of the kind of content you're envisioning, I think it's a wonderful opportunity to work with major content creators to enhance their brands, create their brands, or reinvigorate or extend brands. That's why you see things like the Apprentice. And so we're going to take it one step at a time.

Q: Microsoft (MSFT) is now planning to launch its own search advertising network, which could cut into Yahoo's distribution and market share. How will Yahoo cope with this?

A: When we acquired Overture, that was our expectation. And that's why you see that has already been priced into Yahoo's valuation. We feel we have the benefit of having Yahoo.com, which is an enormous distribution channel. If it turns out that we can stay with Microsoft for longer, or forever, that would be great. But this is nothing that we didn't anticipate. The success of what we're doing isn't dependent on it at all.

Q: CEO Terry Semel has been at the company for four years. He's 62.

A: He's good-looking. Don't forget good-looking.

Q: Of course. So, how often does the topic of succession come up, and who are the internal candidates?

A: Look, there should be no speculation. Terry is here, he's going to be here, we adore him here. We have an amazing team. We enjoy working together: Sue Decker, myself, Terry Semel, and Zad [Chief Technology Officer Farzad Nazem].

I think people try to frame conversations that don't exist. He's 62 years old -- so what? He has more energy than anybody you know. From our perspective, we love being a team. Frankly, one of the most compelling and exciting parts of the job is working with these people. EDITED BY Edited by Patricia O'Connell


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