DECEMBER 6, 2006
Technology
By Robert Hof
Yahoo's Shakeup
In the wake of criticism that the Internet portal is spread too thin, CEO Semel is revamping operations and putting more on Sue Decker's plate
Growing strife inside Yahoo! (YHOO) at last has erupted into a sweeping management and organizational shakeup. The moves, announced Dec. 5, expose a new urgency in the pioneering Internet portal's efforts to shore up flagging fortunes in the face of a relentless advance by rival Google (GOOG).
Yahoo said it's reordering the company into three groups, effective Jan. 1: one focused on advertisers and publishers, another on Yahoo's base of more than 500 million users, and a third on technology. Layoffs, which at least one Yahoo executive had called for, are not in the plans. Two high-profile executives, Chief Operating Officer Dan Rosensweig and Yahoo Media Group chief Lloyd Braun, will leave the company in coming months. One source says John Marcom, Yahoo's senior vice-president of international, also is out. Marcom couldn't be reached for comment. Chief Financial Officer Susan Decker has moved up to head the new advertising group, fueling speculation that she is being groomed to succeed Chief Executive Terry Semel.
The changes, the most extensive at Yahoo in more than five years, cap months of speculation about how it would respond to slowing sales growth, a slumping stock price, and a steady stream of executive departures in the past year. Semel, 64, who turned around the company in the first few years after he arrived in May, 2001, only to see Yahoo lose ground lately, remains in charge.
Refocusing on Customers and Speed of Development The reorganization creates two "customer-focused" groups. Decker, who will remain CFO until a replacement is found, heads the group focused on advertisers, Yahoo's key revenue source. The other, an audience group that will be responsible for Yahoo's vast collection of services, from search to e-mail and instant messaging to music and e-commerce offerings, will be headed by an executive for whom Yahoo has launched a search.
A third group, under Chief Technology Officer Farzad Nazem, will handle technology development. That's an apparent acknowledgment that Yahoo needs to accelerate its tech projects—especially Project Panama, the long-delayed initiative to improve the way Yahoo matches ads with search results. Coupled with the departure of Braun and, just last week, Vice-President David Katz under him, the moves may indicate a shift from a dependence on entertainment to lure customers to an increased dependence on the development of leading-edge tech.
In a statement, Semel said the changes are intended to both speed up the creation of new services for Yahoo's audience and create a "full-fledged" advertising network. "We're putting the right people in the right places to execute our focused growth strategy," he said. He added that the new structure is aimed at "increasing accountability, reducing bottlenecks, and speeding decision-making"—all criticisms leveled by many people inside and outside Yahoo.
"Something Has to Change" The sweeping overhaul acknowledges growing frustration by some within the company over Yahoo's inability to corral a broad array of services into coherent offerings. Some people believe that everything-but-the-kitchen-sink approach has let Google steal a march on fast-growing search ads and related services. "Focus is what the company needs right now," says former Yahoo search vice-president Ali Diab, now cofounder and co-president of a Los Angeles-based startup, ActiveMaps. "Things have gotten a little bit stagnant—just like any large organization. Everyone realizes something has to change."
The announcement also comes two weeks after the leak of a scathing memo from Yahoo Vice-President Brad Garlinghouse that suggested Yahoo needs to sharpen its vision and lay off 15% to 20% of the staff. Insiders say the changes announced Dec. 5 were in the works for months. But one former Yahoo executive speculated that the so-called Peanut Butter Manifesto, so named for Garlinghouse's contention that Yahoo had spread itself too thin, like peanut butter on bread, may have prompted Semel to make the moves now.
The shakeup follows more than a year of disappointing results from Yahoo. The company's sales growth has slowed, failing to keep pace with results at rival Google. As a result, Yahoo's stock is down 33% since the start of the year. In Yahoo's third-quarter analyst conference call, Semel admitted, "I am not satisfied with our current financial performance, and I intend to improve it. We're not exploiting our considerable strengths as well as we should be" (see BusinessWeek.com, 10/17/06, "Yahoo's Project Panama Back on Track").
Succession Planning? Given the magnitude of the executive and organizational changes, it's uncertain when or if they will have an impact on Yahoo's results. The company said profit fell 38% in the third quarter, to $159 million, as sales rose 19% to $1.6 billion. By contrast, thanks to Google's superior ability to target and make money from search ads, its profit surged 92% to $733 million, as sales jumped 70% to $2.7 billion.
Some former Yahoo executives said that despite her lack of direct operating experience, Decker is a bright manager destined to become CEO somewhere—perhaps at Yahoo. Her rise may have prompted the departure, planned for next March, of Rosensweig, who also had been considered a candidate to succeed Semel. Even so, the rise of a finance type to such a key position raises questions among some observers about whether Yahoo has the clarity of vision needed to compete with a juggernaut like Google, and increasingly a newly hungry Microsoft (MSFT).
Rumors recently have suggested that Semel might be headed for the door. But some observers, at least, don't think Semel would be forced out, nor leave at such an uncertain time for Yahoo. Former Yahoo executive Ellen Siminoff, now CEO of search-engine marketing firm Efficient Frontier, says Semel has the backing of Yahoo's board and its management team. Moreover, Siminoff, for one, doesn't place the blame for Yahoo's struggles solely on Semel. "It's hard to blame Terry entirely for the fact that they didn't change their algorithm fast enough," she says.
Some observers believe that Yahoo can recover from its recent stumbles. But that will require several key moves. For one, it must get its Panama ad network on track next year or risk losing even more ground to Google. It also has to find a way to make money off its many new community-oriented services, such as the photo-sharing site Flickr and its social-networking service Yahoo 360. And it must recapture the cachet it once had. "Yahoo has lost the pulse of its community," says Diab.
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