Back to the Future at Yahoo!

With co-founder Jerry Yang at the helm, morale may soar and turnover could plummet. But will profit make a comeback?

by Robert Hof

For a company that helped spawn the commercial Internet 12 years ago, this seems an odd time to have an existential crisis. Web business is booming, especially advertising. And Yahoo! (YHOO) 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. (GOOG), 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. (NWS) 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?

Visionary Needed

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.

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. "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.

More of the Same?

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. 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 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.