)has capitalized on that, building a business worth $37 billion on the stock market. But that only sounds impressive if you're not up against a $160 billion juggernaut, Google Inc., that keeps pulling away in the metrics that matter.
So it was that Terry Semel, Yahoo's chief executive and a longtime media mogul, found himself in what may go down as his last great schmooze session as an Internet boss. At a meeting he set up with News Corp. officials, a source says, Semel tossed out a stunning proposal: What if Yahoo handed out, say, a quarter of its stock in exchange for MySpace.com, a social-networking site that News Corp. bought two years ago for $580 million?
No deal materialized, and now it may never. On June 18, Semel stepped down as Yahoo CEO, passing the torch to Jerry Yang, one of the company's co-founders. With the surprise appointment, the Yahoo board is betting that Yang and newly appointed President Susan Decker can cut through the bureaucracy and indecision that have grown up around the company, leading it out from under the shadow of Google (see BusinessWeek.com, 5/30/07, "Google Is Making You Dumber").
For many within Yahoo's Silicon Valley campuses, there is a sense of relief at the long-anticipated departure of Semel. True, Yang, self-effacing and by most accounts a bland public speaker, appears to be an unlikely corporate leader. Even his previous title--Chief Yahoo!--evokes a playfully casual image. But many techies see him as the only logical choice to energize the Yahoo troops. If there's one truism in Silicon Valley, it's that the most successful tech companies are still best run by leaders with technology chops, preferably the founders. Yang, 38, is a tech nerd from way back who still has a passion for the Internet. "He's no Steve Jobs," says Ned May, an analyst with media researcher Outsell Inc. "But he's a founder. Putting a founder back in the reins will create excitement inside Yahoo."
More than anything, that's precisely what Yahoo is lacking. If Jerry Yang appears to some observers more symbol than CEO, he's just the symbol that Yahoo's 12,000 employees from Silicon Valley to Mumbai yearn for. They want someone with the authority to flatten the layering that built up under Semel, whose perceived diffidence and lack of deep Internet roots turned off techies and led to a wave of departures by key personnel. They also want someone who's a real Valley Guy, who knows that survival in this Darwinian place means quickly building or buying new technologies even--no, especially--if they undercut existing business models. "Yahoo needs a visionary driving forward against the competition more than a seasoned executive," says one Yahoo vice-president, who is rethinking a plan to leave the company because of Yang's new role.
Yang will need to be much more than a cheerleader. Decker, 44, may emerge as the operational force behind a more streamlined Yahoo, whose myriad online properties one executive compared to thinly spread peanut butter last October. Already, the seven-year veteran has chopped out a management layer created by Semel's reorganization last October.
Still, it's fair to ask whether Yang and Decker can close the performance gap between Yahoo and Google (table). Skeptics see the pair as an expedient choice that buys time for the company to find a more mainstream CEO or entertain a buyout or other deal. Semel's informal talks with News Corp. are just one of the wild scenarios that have popped up recently. (Both companies declined to comment.) Some investors believe Yahoo could become the next meal for hungry giants, such as Microsoft (MSFT
), Comcast (CMCSA
), or a private equity outfit. Reports in May that Microsoft Corp. was interested proved to be based on months-old talks that never came to fruition. Others have suggested Yahoo should dump its search efforts and outsource them to Google for a cut of the ad revenues.MORE OF THE SAME?Those possibilities all appear to be long shots, at least for now. But the very fact that they are even raised underscores how Yahoo's future is on the line. Indeed, some analysts and people close to the company fear that Yang and Decker may not make substantial changes to the company's direction. "People who look at [Semel's departure] as some kind of watershed event that is going to result in fundamental change at the company are going to be disappointed," says Standard & Poor's (MHP
) analyst Scott Kessler. He has a hold rating on the stock, which fell 2%, to 27.63, the day after the announcement.
Most of all, the Yahoo chiefs must somehow find a way to stop losing ground to Google's search engine and the lucrative little text ads that run next to its results. Yahoo has yet to demonstrate the gains in revenue-per-search that were supposed to follow the February release of Panama, a new ad system. With Google's searches bringing in 40% more revenue on average than Yahoo's, Panama is intended to better match search ads to what users are looking for so advertisers will pay more for them.
Even Yahoo's mainstay display ad business, the banner and video ads that make up more than half its ad revenues, is under pressure. Decker says declining growth in display advertising could drop second-quarter results below the midpoint of Yahoo's previous forecasts. And Google and Microsoft have each squarely targeted display ads--Google with a $3.1billion deal in April to buy online ad firm DoubleClick Inc. and Microsoft with its $6billion purchase of aQuantive (AQNT
Yahoo has also failed to make a big splash in social-networking services, like MySpace.com and Facebook, that dominate much of the new online activity today. Yahoo took a run at Facebook last year but didn't close a proposed $1billion deal. Now Facebook's popularity is soaring. In another miss last year, as it struggled to consolidate 16 different video services, Yahoo watched Google swoop in to buy leading video-sharing site YouTube (GOOG
) for $1.6billion.
People who know Yang well are hopeful. They say he makes firm decisions and champions innovation initiatives, such as an internal idea incubator called Brickhouse that Yahoo opened in March. Says one executive: "You always come out very energized after every meeting with him."
For all the challenges, Yang and Decker probably have some running room. Everyone from Madison Avenue ad agencies to Hollywood moguls craves a foil to increasingly powerful Google. Yahoo is their best hope. "None of the advertisers wants a monopoly," says Kevin Lee, executive chairman of Did-It Search Marketing.
And many people in the Valley retain a soft spot in their hearts for Yahoo. Michael Tanne, chief of Web-search startup Wink Technologies Inc., notes that nearly half of his 17-person staff hails from Yahoo, and they still harbor warm fuzzies about it. Of course, departures like those are a big part of Yahoo's problem. If Yang can somehow reverse the flow of talent and get that well of goodwill working in his favor, Yahoo may yet score with its "Hail Jerry" pass.
With Catherine Holahan in New York By Robert D. Hof