Not afraid of Google

CEO Terry Semel on where Yahoo! will grow next. "Yahoo! is more than just a search"

Saturday night, April 9, 9:00 pm. Terminal 1 at Ben Gurion Airport is completely deserted. Only in the Massada reception room, which, like most VIP reception rooms, is located in the back of the terminal, where the masses will not disturb the VIPs' rest, is there any movement. There is a representative of the Israel Immigration Police, a group of security men, and someone acting as a host-waiter. The only passengers at the moment, on a private 10:00 pm flight, are Terry Semel and his wife, Jane. Wearing Nike sports shoes, with slightly unkempt hair and several days beard on his face, Semel doesnt look like the chairman and CEO of the worlds largest Internet company, the man who only recently exercised options for at least $230 million, and contributed $25 million to a neuro-psychiatric institute at the University of California.

Semel takes care to stress that he is on a private visit. My wife and I very much wanted to visit Israel. We came as tourists just to see it, and its great; we had a very good time, he gushes. We saw quite a lot. We met many people, and visited pretty places. Were already thinking about the next time. On the other hand, when an out-of-the-way place like Israel hosts a Jew as highly placed as Semel, public matters becomes intermingled with private ones. Even the security arrangements for getting on the plane are carried out with a maximum of respect and a minimum of bother for the traveling couple. You cant do this; hes the owner of Yahoo!, one of the security people rebukes his colleagues on his walkie-talkie.

Despite the fact that he is now completely identified with Yahoo!, Semels entry into the company wasnt smooth and easy. While he is responsible, together with Bob Daley, for turning Warner Brothers into the media and entertainment giant that it is today, the rules in Hollywood differ from the rules of the Internet, and the laws governing public companies are very different from those applying to private companies. On the other hand, after 24 years, and given his record, Semel could have arranged a far more glittering job than an Internet company that had got into trouble and had begun a painful streamlining process. Semels resume seemingly includes nothing that qualifies him to manage a technology company. Terry wasnt looking for a job, Daley said at the time. He was looking for a challenge.

Semel found his challenge, and met it. Within a few quarters, he won a place in Yahoo!s hall of fame, and put on the best and most enviable show in Silicon Valley. He raised Yahoo! from a rock bottom market cap of just over $4 billion to a company with a market cap of $48 billion, double that of General Motors, the epitome of American industry. He took the company from wrenching losses of tens of millions of dollars to record revenue of $3.57 billion, and a net profit of $840 million. The significance is greater than the increase in the numbers. Semel turned a hard to quantify dot.com phenomenon into a stable, robust moneymaking machine. In a more universal sense, he was making a statement about the health of technology companies. The era when the philosophy of if you built it, and it attracts a lot of clicks, go on running it, came to an end. The philosophy of the Semel era is based on a solid economic foundation.

Semel also personally deviates to some degree from the norm for the industry that he leads. When he became chairman and CEO of Yahoo!, he admitted that he usually didnt use e-mail. Im still a beginner in the Internet, but Ive learned a lot, he confessed on his visit to Israel. His conduct and management style are more reminiscent of the old-style movie tycoons than those of managers of the worlds largest and fastest growing Internet companies. In contrast to high-tech managers, who love seeing their pictures in the newspapers and reading their chatter with the media, Semels motto is results talk. An attempt to query whether the dot.com bubble was recurring was rejected on the spot. Semel prefers using old economy expressions.

I cant speak for every company, or for the entire Internet, but I think there are several really stable and serious Internet companies, and Yahoo! is one of them. These companies have great business, and are growing consistently year-by-year. These are serious businesses; theyre here to stay, and they have enormous opportunities for growth.

Google Doesnt Frighten Me

Semel is described as being suspicious of the media, secretive, and standoffish. He is known as somebody who doesnt usually give interviews to the media. Yahoo! has the best business model in the Internet, he said in an interview not long ago, and it has nothing to do with getting your picture in the paper, but with doing the real thing: performance and consistency in the long term.

When we sit down for an interview, he really seems ill at ease. His answers are short and correct. Thats the last question, right? he hints. On the other hand, he is considered a tough warrior in the market. As Yahoo! COO Dan Rosensweig puts it, He expects a new fight every day.

Semels biggest and most widely publicized battle was with Google. In mid-2000, when Google was a search engine just past the start-up phase, Yahoo! adopted it as its search engine. Two years afterward, little Google, with its elegant home page, began to sound like a giant, and started primping itself for an IPO. This was one of Semels biggest tests: the apprentice was turning on his master, and boasting that he would beat him in a duel. Semel wouldnt concede. In late 2002, he acquired Inktomi, which develops search technologies, for $235 million. Just over a year ago, he re-launched Inktomi as Yahoo!s search engine, and said goodbye to Google. Since then, Google has held a successful IPO, touched a $50 billion market cap, and become the medias darling. Semel, in any case, is not worried about lagging behind. Weve been in the search field with our engine for about a year, he says. I think we did excellent work during this year, and there will be many developments and innovations.

Globes: Google has become a tough competitor. The markets and the media like it.

Terry Semel: Google is a very good search company, and Yahoo! is also a very good search company. You musnt forget, however, that Yahoo! is more than just search. We have many functions, and we have a great many competitors in each function and in each vertical in which we operate, whether its news, sports, finance, or games.

As the technology market revives, this competition will only get stiffer.

Yahoo! is used to competition. I think that good competition is a healthy thing. We hope to be very good in everything weve done, and that well do in the future. In general, our goal is to supply our consumers with the best products and services.

This is where one of the main differences between Yahoo! and Google lies. Google positions itself as a boutique, with a few high-quality services, such as free e-mail with an unprecedented volume of 2 gigabytes. Yahoo! positions itself as a supermarket, in which you can buy any Internet product you want: chat rooms on any topic, news services, travel agencies, bargain sales, a financial portal, sports and television experiences, career management, and finding a job. Yahoo!s strategy is to offer everything, thereby making itself the default option for everyone who needs something on the Internet. With this strategy, you have to be very good in what you do, but you dont have to be the best, because excellence lies in the array of functions. Diversity has paid off for Yahoo!, which has become an Internet destination for finding other sites, and any kind of information, CBS analyst Larry Magid explains.

There is another significant difference between Yahoo! and Googles concepts. Google is trying to save and improve the world with its products and solutions. It invests in markets that dont exist yet. Yahoo! does not purport to change the world; it follows the existing markets that it wants to conquer. I wake up every morning thinking about what our customers want, Semel said a few months ago, thereby crowning Yahoo!s consumers as its formal programmers.

The Future Lies in the Entertainment Industry

Competition between Yahoo! and Google is waning, however, as the companies pick up speed on their divergent roads. Current market wisdom holds that Google is planning to develop computer and Internet infrastructure functions, such as an operating system and browser, in competition with Microsoft. Yahoo!, on the other hand, is going to Hollywood; the company is bolstering its entertainment content. Its biggest competitor is therefore America Online-Time Warner. Last year, Yahoo! founded a new entertainment division, located in Santa Monica, near Hollywood, with enough space to contain a thousand employees. Former ABC Entertainment Television Group chairman Lloyd Braun manages the division, and more managers were recruited from Warner Brothers, Semels previous place of employment, to work with Braun. They have already managed to sign a content cooperation agreement with several major studios and producers, such as Mark Burnett, the producer of The Apprentice and Survivor.

In a rare public comment, Semel confirmed that Yahoo! is moving in the direction of content production. Yahoo! rests on four basic pages: personalization, large communities of people, content, and search, he explains. Over the years, it has invested quite a lot in all of these four pages. This has also left its mark in terms of content.

Content is something that Yahoo! has always done, whether through licenses, collecting, or on occasion creating our own slices of content for our users. I plan to continue following this route. Its not new. Its the same route, but the advantages of broadband enable us to assemble more video, which will be a significant component, and greatly enrich the experience of our consumers. High-speed Internet facilitates a better experience, and enables people to download music and see new things, whether its news, sports, or games. Were there in everything thats digital and makes it possible for us to supply a better product and provide a better service.

Is that why youre cooperating with producers and studios?

Right now, were in touch and cooperating with many content companies. We get licensed content from them, whether its news, sports, games, pictures, or other activities, and they enable us to do a better job. In the future, we may also connect with the major studios.

Semel is discreet, and does not provide details, but the market believes that Yahoo! is going for a merger or strategic cooperation with giants, on the America Online-Time-Warner model. For his part, Semel prefers cooperation to a merger. As an Internet-media company, Yahoo! believes that television networks, movie studios, and music companies should regard it more as a partner than as a candidate for a merger, he said recently at an investment conference in New York. I think that theres another alternative, and Yahoo! is a perfect partner, which can help the conventional media. We dont want to look like television. On another occasion, he explained that Yahoo!s production possibilities will not be movies or television programs, because as a media, the Internet has to be interactive.

In any case, Semel does not believe that the Internet will wipe out the traditional communications media, with which he wants to create close cooperation. Yahoo! will come to this wedding as a strong distribution channel, if not the strongest on the Internet. Yahoo! can distribute exclusive content that relies on the studios (such as 40 minutes of every episode of The Apprentice, which is broadcast on the website on the same day as the television broadcast), and joint content. Semel does not disclose in public all his ideas in the field, and the hints that he does throw out are carefully scrutinized. For example, a month and a half ago, he said that Yahoo! believed that that it could create simple content by developing new ways for its hundreds of millions of users to create and distribute their content. He has also made a few non-committal hints about blogs, the latest Internet hit.

Another option emerges from remarks by UBS Warburg analyst Ben Schachter: I can easily imagine how, in another five years, Ill be using my credit card to pay Yahoo! to watch a movie premier on my computer. In any event, regardless of what content Yahoo! produces, It will have to be more special and smarter than other mass media, Semel summed up on Yahoo!s tenth birthday.

As part of its entry into the entertainment game, Yahoo! acquired MusicMatch, a program for downloading and managing music files, for $160 million at the end of last year. Yahoo! is committed to being the leading player in digital music, Semel declared at the time. It matches our strategy of catching the largest consumer audiences when they switch to digital music, and supports our goal of providing consumers with more possibilities for selection, control, and flexibility in the way that they connect with music. This acquisition was one of several innovative products in which Yahoo! will invest in the future in order to build a music portfolio.

An intriguing aspect of Yahoo!s entertainment activity came to light during Semels visit to Channel 10, the new baby of his friend, movie producer Arnon Milchan. Semel and Milchan, who has become a significant partner in the channel, first became acquainted when Milchan was doing business with Warner Brothers, and distributed its movies. During Semels visit, the subject of cooperation with Channel 10 on content was raised. When I asked Semel about the possibility of such cooperation, he was careful not to reveal too much. They asked, and this is something that Ill look into after my vacation, when I return to California. He eventually remarks, At the moment, I think its still not ripe, and I prefer not to comment on it.

Personalized Internet

While the Yahoo! supermarket continues to expand, offering more and more categories, and more and more products in each in category, Semel is also steeriing the company into personalization. For example, Yahoo! communicates with its customers in over 15 languages, and perhaps, in the future, Hebrew will become a Yahoo! language. Another personal element is making the site more localized. If you are looking for a plumber or a pizza parlor, you don't want one 3,000 miles away, Semel explained two months ago. You want your search to be customized just for you. That means including very large communities and groups representing millions of people having very specific fields of interest. They spend a lot of time on Yahoo! in order to express the same needs. Bear in mind that a neighborhood website like this will be attractive and hard to replace, and will therefore be attractive to advertisers.

This personalization capability, together with the worlds most advanced technologies for vertical searches, blogs, social networks, and content distribution, is creating what technologically oriented young people love: a page that creates an online identity for a user, with a picture, biography, and blog pages. Such a personal online product is a prodigious advertising anchor, even if its business model is not yet clear. The potential strategic gain from the blogosphere is substantial, as it could change the way we use the Web Yahoo! will need to lead in this area if it is to sustain its leadership, analyst Marianne Wolk writes.

According to Semel, Yahoo! will reinvent both itself and Internet content. This year, youll see more and more links between Yahoo!s same four basic pages: personalization, communities, content, and search, he announces. Well enrich the experience and activity of our communities, and enable them to do more than each can do separately. Eventually, before the end of this year, Yahoo! users will be able to not only us these four pages, but also link them to every type of device, so that all the mobile devices in the communications world, including computers, mobile phones, and other mobile devices, can be used with Yahoo!s four functions.

Where is the Internet going? Is it shifting from the computer to other devices?

I think that the Internet is becoming more and more relevant to peoples lives. Entire generation are now growing up with the Internet, which is becoming more relevant and significant, regardless of whether its on a computer, mobile devices, or in the future becomes part of television. I regard it as the ability of our community to access information and Yahoo!s Internet functions from wherever they may be in the world, from any device they are using. The possibilities are very far-reaching.

Published by Globes [online], Israel business news - www.globes.co.il - on April 21, 2005

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