Yahoo! Turns to Yang

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Likewise, Decker said Yahoo will in part dismantle the reorganization that Semel announced only six months ago. Yahoo had been looking for someone to head an audience group aimed at making sure more people flock to Yahoo's myriad properties, from its home page to sports, finance, music, and other sites. Instead, she will combine the advertiser group with the audience group and head it herself. The company is still looking for a technology chief to replace Farzad Nazem, who departed recently.

But precisely what moves the two will make remains uncertain. Some analysts believe the company needs to continue scaling back operations that aren't attracting advertisers. Yahoo also has tried to tap into the frenzy for social networking. But beyond some small successes, such as Yahoo Answers, a volunteer question-and-answer service, and the purchase of the fast-rising photo-sharing service Flickr, Yahoo has failed to come up with world-beating social services.

Most of all, analysts say Yahoo needs to prove that its new search advertising system, called Panama, will help close the gap with Google. Decker said second-quarter results would show better-than-expected progress with Panama. However, she said earnings guidance issued in April would likely come in only between the midpoint and the low point of those estimates because growth in display advertising continues to slow.

Time for a Change

For well over a year, talk that Semel's days at Yahoo might be numbered kept rising in volume. But in recent weeks, it appears that discussions of Semel's future intensified. Indeed, Semel said in the conference call that succession discussions had been "going on for quite some time.…. I saw myself as a coach more than a player going forward," he said.

At the June 12 annual meeting, neither Semel nor Yang, who was asked by a shareholder if he would step up to take a bigger role, gave a hint that such a big change was imminent. Some analysts and other observers believe that two shareholder votes at the meeting may have persuaded the board to take immediate action. More than 32% of shareholders withheld their approval of at least one director, and nearly 35% voted for a proposal to tie executive pay more closely to company performance.

The only thing some former Yahoos agree on is that the pair must do a better job than Semel. The change, says one former senior executive, was "way, way, way overdue." This person, as well as other former Yahoo executives and managers, say the company became more bureaucratic under Semel, slowing innovation at a time when Google and a raft of new Web companies were coming on strong.

Missed Opportunities

It's not that Semel and other Yahoo executives didn't realize the urgency of catching Google in Web-search share and revenue. But time after time, Yahoo missed opportunities that others seized. News Corp. bought the social-networking site MySpace nearly two years ago for $580 million, while Yahoo didn't manage to snag now-ascendant Facebook despite offering as much as $1 billion last year. Last year, Google bought the fast-rising video-sharing site YouTube for $1.6 billion while Yahoo struggled to consolidate its 16 video offerings.

That trend continued this year in Yahoo's own backyard of online display advertising. Google made a $3.1 billion deal for ad-serving network DoubleClick, which is pending regulatory approval, and Microsoft shortly thereafter spent $6 billion on aQuantive. For its part, Yahoo bought the rest of Right Media, in which it purchased a 20% stake last year, but at a much higher valuation for a company whose presence trails those two.

Bringing Back an Insider

Semel also represented a different mind-set and culture from Yahoo's Silicon Valley roots. His Hollywood style and focus never meshed there, even after he was credited with turning the company around following the dot-com bust in 2000. "There's always been that chasm between technology and entertainment," says Jim Moloshok, a former Semel cohort at Warner and vice-president for media and entertainment at Yahoo until late 2005.

By most accounts, Semel also didn't develop a deep enough understanding of technology. "He was a fish out of water," says former Apple executive Jean-Louis Gassée, now a venture capitalist with Allegis Capital. "He just doesn't have the touch for technology, which is a necessary but not sufficient condition for success [on the Internet]. That's what propels Google."

For all the challenges, both Yang and Decker win kudos, especially inside Yahoo, which as much as anything needs a strong dose of managerial inspiration. "Jerry's got a uniquely honed intuition about the industry," says a former executive. "But does he have the skill set and the guts?" Decker, this person says, is smart and disciplined, but untrained in technology, marketing, or sales. "Together, they might be O.K. But they're exercising these muscles for the first time."

Hof is BusinessWeek's Silicon Valley bureau chief.
With Catherine Holahan in New York.