Marissa Mayer is sitting in URLs, the Yahoo! (YHOO) cafeteria, making the case for the future of a company that almost everyone in Silicon Valley views as doomed. Employees swarm around her, assembling rows of chairs for the afternoon’s FYI, a new weekly ritual where employees get to lob questions at Mayer and her executive team. It’s been a long July, in which Mayer’s one-year anniversary as chief executive officer was marked with an uninspiring second-quarter earnings report. Mayer prefers to focus on the company’s increase in Web traffic. She won’t give numbers but says it’s enough to erase the entire decline from the previous year. “Name another Internet giant that went through three years of decline and then started to grow again,” she says. “It’s a very good sign.”
When Mayer left her executive role at Google (GOOG), she knew she was taking on what might be the hardest job in the Valley. Yahoo has had a lost decade, laboring under a series of failed product strategies and CEOs. It was a Web directory under founders Jerry Yang and David Filo, then a Web portal under Tim Koogle. Terry Semel made it a tech company with Hollywood pretensions, and, most recently, it languished under Carol Bartz and Scott Thompson as a dot-com relic known mostly for losing its top talent to competitors.
Now Mayer wants to transform it into a media company for the mobile age. She’s refocusing her 11,500-employee company on the kind of personalized, habit-forming content that people view on tablets and phones. That means new kinds of e-mail, messaging, and news applications, tailored to the location-aware and always-on nature of the mobile experience. “I hope that at some point we are looking at a world where mobile is a majority of our revenue,” she says.
Since Mayer took over, Yahoo stock is up 75 percent, though the rise mostly reflects the increasing value of the company’s ownership position in the Internet giant Alibaba, which dominates China’s e-commerce market. She’s cut away ribbons of red tape and instituted an internal online service called PB&J, for process, bureaucracy, and jams, that allows employees to complain about organizational snafus. Under her watch, Yahoo has released new Yahoo Mail and Yahoo Weather apps that have impressed users and critics. The company reports that attrition, including employees who’ve landed better jobs elsewhere, fell by 59 percent in the second quarter. “Marissa has done two things at Yahoo,” says Ben Ling, a partner at venture capital firm Khosla Ventures and a former Google colleague. “She has made it an attractive place for top talent to work, and she has begun to release products that engage consumers on a daily basis.”
At 38, Mayer is young for a CEO, but she’s been a Silicon Valley icon for more than a decade. As Google’s first female engineer, she was renowned for her work ethic and public ease with her initial public offering riches. She invested in a cupcake store, became active in San Francisco philanthropy circles, and once paid $60,000 at a charity auction for lunch with Oscar de la Renta, her favorite designer. Lest anyone think her too profligate or fabulous, there’s her laugh—a honking sound so nerdishly distinctive that a compilation video of it has more than 500,000 YouTube views.
This balance of charisma and credibility has been crucial to Yahoo’s effort to revive its depleted ranks of researchers and engineers, especially for developing mobile technology. There have been some stumbles, though. Her comments about the ease of parenting a newborn outraged a lot of working mothers (Mayer has a 10-month-old son), and she unintentionally started a national debate by ordering all of Yahoo’s work-from-home employees back into the office. Last month the company handed Third Point, the hedge fund controlled by activist investor Dan Loeb, a $655 million profit by promising to buy back 40 million of its shares as Loeb and two others resigned from the Yahoo board. Critics chastised Mayer for paying full price for such a large block of shares to someone who was instrumental in her hiring. Yahoo spokeswoman DJ Anderson says the company already had a repurchase plan in place. “Our price was based on market closing, and Yahoo did not pay a premium,” she says.
Shareholders are still waiting for the change that really matters: revenue growth in search and display advertising. In the second quarter, Yahoo’s revenue dropped 7 percent from the year before. Meanwhile, Facebook (FB) and Twitter are taking ever larger chunks of everyone’s time; Netflix (NFLX), Hulu, and Amazon.com’s (AMZN) Prime Instant Video service have become online TV networks; and Facebook and Google are carving up the display advertising business. Internet users no longer consume big meals of news and entertainment at a single Web portal—Yahoo’s previous raison d’être. Now they snack on morsels of information from all corners of the Web.
Yahoo executives may have stopped being in denial, but publicly at least, they don’t own up to the long odds. Kathy Savitt, a former Amazon exec and Mayer’s marketing chief, won’t even call her mission a turnaround. “We call it a renaissance,” she says, “because Yahoo is still one of the largest brands in the world.” To Mayer, the emergence of smartphones resets the game in Yahoo’s favor. “What people want on their phones is content. It’s just another way of delivering the Web,” she says. “I’m an optimist. I think all leaders are.”
Mayer decided early that Yahoo’s fortunes were tied to devices. Upon taking the job, she memorized a list of the top things people do on their cell phones and would recite them, unasked, to family and friends: phone calls, texts, e-mails, maps, weather, news, stocks, sports, games, photo sharing, group messaging, celebrity gossip, and financial news. “I remember financial news and stocks were both on there, and that sounded like cheating because they’re kind of the same,” she says.
Yahoo wasn’t going to pursue advances in voice-recognition, texting, or maps—she knew too well the expense associated with such development as well as the distance of Google’s head start—but the rest aligned closely with Yahoo’s most popular services. Yet when she began reorienting the company, Mayer discovered there were only a few dozen engineers working on apps. That’s not because Yahoo was late to the mobile revolution, but because it was too early. A decade ago, Yahoo built a mobile team under a former executive named Marco Boerries. The effort ran into a classic Innovator’s Dilemma: Yahoo’s success was tied to the traditional Web, and the company didn’t want to risk anything that might undermine profits. When Bartz took over as CEO in 2009, Boerries left to start a mobile company in his native Germany, and his group was disbanded. Some engineers were repatriated to their product teams, where they had trouble persuading colleagues to focus on mobile. Almost all are working elsewhere now.
Among Mayer’s top priorities was to reestablish a centralized mobile group. To run the unit she selected Adam Cahan, 41, whose startup, IntoNow, was acquired by Yahoo for around $20 million in 2011. Cahan, like Mayer and many of her lieutenants, is an exuberant dresser. For an interview, he wears gray, linen-covered shoes, a shirt with the top two buttons open, and a stack of bracelets he calls his “man jewelry.” Cahan says his mission is to build the largest software-only mobile development team in the world and to create applications based on Yahoo’s commonly used Web services, such as its Fantasy Football league and the feed of headlines and entertainment news on its home page. It sounds simple enough, but Cahan insists it’s a big change. Before Mayer took over, “there were elements at Yahoo very focused on the mechanics of a quote unquote turnaround,” he says. He argues that it’s a significant shift just to focus on users and build products instead of catering to the balance sheet.
Cahan’s biggest challenge is that engineers who develop mobile apps are young and scarce. Working for a limping giant such as Yahoo is rarely high on their list of personal goals. So Mayer and Cahan have bought talent, spending close to $200 million to acquire at least 18 startups, in addition to blogging network Tumblr for $1.1 billion. In each instance, Yahoo has locked up engineers with two- to four-year contracts and set them loose to build apps and hire more mobile developers, according to two people familiar with Yahoo’s deals who weren’t authorized to speak for the company. Despite the cash, it’s not an easy leap for entrepreneurs to make. “I was really worried,” says Josh Schwarzapel, a senior product manager for mobile whose video chat startup, OnTheAir, was acquired by Yahoo for an undisclosed amount in December. “I had a lot of friends who came in [to Yahoo] and were rejected by the host.”
Cahan’s division, called Mobile and Emerging Products, now exceeds 330 people and has its primary offices in New York, San Francisco, and Sunnyvale, Calif. Underscoring mobile’s importance, Mayer ordered the team’s work space in Sunnyvale renovated. Unlike the soporific purple and beige cubiclevilles that fill the rest of Yahoo’s dot-com-era headquarters, the mobile group has adjustable workstations that let employees sit or stand. There’s an exposed ceiling, whiteboards on every other wall, and big colorful posters that display giant iPhone screens.
The division’s employees also get personal attention from the boss. Mobile engineers describe regular product reviews where Mayer pushes them to move faster and think bigger. She often focuses on individual pixels on the screen and is comfortable letting her instincts trump empirical data. “Just because we have a ruler doesn’t mean we have to measure everything,” she said at one review, according to Lee Parry, senior director in the mobile group and a seven-year Yahoo veteran.
Over the last few months, Cahan, Parry, and their colleagues have released apps for Yahoo Mail, Weather, Fantasy Football, and the Flickr photo-sharing service. They’ve also unveiled the Yahoo news-reading app, which integrates technology from Summly, a startup founded by London teenager Nick D’Aloisio that Yahoo bought in March for $30 million. The app uses Summly’s text-summarizing software to abridge everything from sports game recaps to Mayer’s own quarterly earnings presentations.
Yahoo says that after redesigns, traffic to mobile applications such as Yahoo Mail, Yahoo Weather, and the news app is up 120, 150, and 55 percent, respectively. There are clearly more apps on the way: A large chart on the office wall has a schedule crammed with product launches and suggests that apps for Yahoo Groups and Messenger are in the works. “We know there is going to be skepticism,” Parry says. “The fact that we are already seeing the payoff is giving everyone faith that we’re on the right path. That’s what Marissa is so great at. She’s shining a light and beating a path to the horizon and saying, ‘This is where we are going.’”
There was no shortage of skepticism when Mayer departed Google, her only professional home, for the dismal scene that was Yahoo last summer. A pay package valued at $36.6 million in salary and stock for 2012 alone, according to company filings, was no doubt convincing, but Mayer insists she was passionate about the opportunity. And though she vows to focus an interview on corporate strategy, she can’t resist describing her momentary panic and disappointment when she thought she didn’t get the CEO job.
Mayer had pursued the position in total secrecy. She had to say the code words “project cardinal” to a limo driver waiting outside her Palo Alto home, who then drove her to a Silicon Valley law firm for a meeting with Yahoo’s board. The board was supposed to call with its decision by 8 p.m. When the hour arrived, she and her husband, investor Zachary Bogue, were at a dinner party, and Mayer was battling the urge to keep checking her phone. “I saw such an opportunity here,” she says, “and felt like I had so many ideas.” She also felt that after 10-plus years at Google, it was time to leave.
At 9:45 p.m., Mayer’s phone was still silent. She was crestfallen and making frantic hand gestures to Bogue that she wanted to leave the party. (Bogue, enjoying his seat next to former San Francisco 49ers quarterback Joe Montana, wanted to stay.) Finally, as they were saying their goodbyes, Mayer got a call from Jim Citrin, a partner at Yahoo’s executive recruitment firm, Spencer Stuart. Propriety demanded she let it go to voice mail. A year later in the Yahoo cafeteria, she taps her iPhone screen and plays it: “Marissa … you should be smiling,” Citrin is saying. “We’re smiling. Call me ASAP.”
Mayer is relentless in her search for other believers. In addition to her mobile hiring spree, she’s begun shifting funds back into Yahoo’s research organization, which previous CEO Thompson gutted in a round of layoffs. She says the lab has a goal of hiring 50 Ph.D.s this year and has already signed up 30.
One place where these hard-core researchers might focus their attention is search. Although Google dominates the space and Yahoo has had Microsoft (MSFT) power its search engine for the last three years, Mayer still believes Yahoo can find new ways to present search results. “Search is far from over,” she says. “It’s physics in the 1600s or biology in the 1800s. There’s miles to go before you get to quantum physics or even a microscope. There’s a lot of that you can do once you have mobile, and we are going to be very focused on the user experience.”
Unlike other mobile powers such as Apple (AAPL), Google, Facebook, Samsung, or Amazon, Yahoo neither controls an operating system nor makes popular hardware devices. And unlike Netflix—or HBO (TWX) or Showtime (CBS), for that matter—it doesn’t own blockbuster shows people are willing to pay to watch. Yahoo’s Weather app may delight design aficionados, but it doesn’t hold a user’s undivided attention the way an episode of Game of Thrones does on HBO Go. Mayer has locked up at least some exclusive content. In April, Yahoo purchased the online rights to old Saturday Night Live clips for an undisclosed amount. She says her strategy is to partner with other players, pushing Yahoo’s licensed content, original shows, and collection of apps to other companies’ hardware. For example, Yahoo makes the default stock-quote application on every iPhone, and Mayer has talked about doing more such deals. The risk is that any company might decide at a moment’s notice to replace Yahoo’s offerings with something else.
Even if its free mobile apps become huge hits, Yahoo has to figure out a way to monetize them. The company is no doubt quietly developing a strategy to advertise within its mobile services, though Mayer will only say she’s focused on developing products that users love. Even there, though, rivals are ahead. Facebook stock rose 30 percent the day after it revealed that 41 percent of its revenue now comes from ads on phones. Although Yahoo doesn’t disclose mobile revenue, Macquarie Securities analyst Benjamin Schachter estimates its mobile ad percentage is well under 10 percent.
For all her credibility with engineers, Mayer is an unknown to Yahoo’s biggest advertisers. “To be out there meeting with clients and advertisers is not her thing,” says Marla Kaplowitz, the chief of media agency MEC North America. As for its products, “Yahoo still needs to be a lot more nimble,” says Kaplowitz, noting that running large ad campaigns across Yahoo’s stable of services is particularly cumbersome.
Yahoo’s revenue topped $7.2 billion in 2008 and has since fallen by almost half. For the last 12 months, sales were $4.8 billion. “I’m not confused; I know we have a lot of work to do,” Mayer says, standing up in the URLs cafe as the FYI session is about to begin. “Up until now, things have gone really well. If you tell me that I’ve got to go back to last July and do it all over again, I’m not sure I could. I was optimistic, but a lot of the progress we have made has surpassed even my expectations.”
By way of explanation she mentions an improbable role model: Sarah Hughes, the American figure skater who competed at the 2002 Winter Olympics in Salt Lake City. “No one thought Sarah Hughes had a chance to win,” she says. Then all the favorites flubbed their routines, and Hughes landed seven spectacular triple jumps and ended up with the gold. “Afterward, Hughes said that she didn’t quite know how she had done it,” Mayer says, “and she wasn’t sure she would ever be able to repeat it. It was the routine of her life.”
It’s an inspirational story that could be interpreted in two ways: Plucky underdog triumphs because of talent or because superior rivals choke. “I feel like Sarah Hughes,” Mayer says. “Actually, I still have her performance saved on my TiVo.”