Yahoo!'S General Says "Charge!"

With Yahoo! reeling, Jeffrey Mallett must rally the troops and pull in more cash

Jeffrey Mallett knows a thing or two about being an underdog. The five-foot, five-inch, 140-pound Yahoo! Inc. (YHOO) president looks like a kid just out of short pants. Back in college, his appearance won him runner-up status in a Michael J. Fox look-alike contest. But those boyish looks can be a drawback in the gritty business world. People regularly mistake Mallett for a twentysomething marketing assistant, rather than Yahoo's 36-year-old field general. On more than one occasion, Mallett has found himself straining to convince business associates he has just met that he is, indeed, Yahoo's No. 2 exec. "Sometimes, people will just gasp when I introduce myself," he admits.

It's a nuisance, but Mallett doesn't let first impressions hold him back. While Yahoo's big-picture co-founder, Jerry Yang, and mellow-as-wine Chief Executive, Timothy A. Koogle, get most of the ink, no one has been more responsible for the megaportal's rise to Internet stardom than Mallett, the third of the company's "Three Amigos." With Mallett in charge of day-to-day operations, six-year-old Yahoo has established itself as the second-most-popular entry point to the Internet, after America Online Inc. (AOL), with an audience of 55 million visitors. Better yet, the company has been churning out the dough, registering a profit of $291 million on $1.1 billion in sales for 2000. "Mallett has been the wizard behind the curtains pulling all the levers," says Andrea Williams Rice, managing director of Deutsche Banc Alex. Brown.

But suddenly, Yahoo is sputtering. Blindsided by a sudden slowdown in Internet advertising spending, which accounts for 90% of its revenues, this year's sales are expected to slow to $1.19 billion--a paltry 7% growth rate, down from 88% last year. Analysts say its profits could drop to $248 million this year. Fearful investors have sheared Yahoo's market valuation by 80%, or $90 billion, since early 2000.

Now, the time has come for Mallett to step out from behind the curtain and prove that he's more Napoleon than Wizard of Oz. It's his job as president and COO to reduce the company's reliance on dot-com advertisers and better cash in on its immense audience. In an attempt to super-size revenue growth, Mallett is spearheading several initiatives, internally dubbed "Yahoo 2.0."

In the advertising realm, Mallett aims to winnow the company's dot-com clients from 33% of its advertising sales to just 15% by the end of the year. To accomplish this, he is trying to tone down Yahoo's brash swagger at the deal table--which is at least partly due to his own cocky personality. In the past, Yahoo has been reluctant to negotiate on rates or other terms--and that alienated potential brick-and-mortar advertisers. Now, it's showing a new willingness to do business their way. It's also attempting to boost ad revenues in the 23 foreign markets where it operates portals.

To goose nonadvertising revenues, Mallett is expanding some of the company's newer businesses. Yahoo just began selling customized Web portals for corporations. Lump that together with its Web conferencing business, and Mallett expects the two to double in size this year, to $200 million, or 17% of revenues. Mallett also aims to charge up e-commerce. Yahoo gets a cut each time a visitor shops at one of more than 120 major retailers in its online mall. Mallett is trying to woo more stores--and analysts expect him to nearly triple that business, to $90 million, this year.

To make things happen fast, Mallett is rethinking the way he operates. He's spending 20% more time on the road, spreading the gospel of a new, more diversified Yahoo to employees, advertisers, and potential partners. It's a zeal he expects employees to match. At a manager's retreat in Yosemite National Park in October, just as the Net-advertising malaise began to hit home, Mallett challenged 275 execs to do a gut check. If they weren't 100% committed, he said, it was time to move on. "Whenever Jeff speaks, you always get the sense that he's rolling his sleeves up right next to you," says one attendee. Says Yang: "We're entering a whole different mind-set. Jeff is making our troops understand that."

Mallett's game plan has won the approval of most analysts, but it's not clear yet that he's going far enough, fast enough. The newer revenue streams will take a couple of years to fully develop, leaving Yahoo's advertising makeover as its most important short-term push. Even though Mallett & Co. are reaching out to traditional advertisers and building relationships with their agencies, some changes are slow in coming. "Unless you're talking about a contract in the millions of dollars, you get the same old Yahoo," gripes an executive at a major U.S. advertising agency.

Easy pickings? If Mallett falls short of his goals, the consequences could be dire for Yahoo. With a low stock price, it can no longer afford to buy companies to boost its technology, content offerings, or viewership. Meanwhile, it's easy pickings for Old Media giants looking to buy a valuable piece of Net real estate on the cheap. Both Walt Disney (DIS) and News Corp. (NWS) have expressed interest over the past 18 months in acquiring Yahoo, according to Mallett, and Viacom is rumored to be interested, too. While being taken over could still be lucrative for Yahoo investors and employees, it would be a major disappointment for a swashbuckling outfit that has long insisted it can become the preeminent media company of the 21st century.

The Yahoo makeover is the defining moment in Mallett's budding career. After cutting his teeth at over a half-dozen family-run businesses in Victoria, B.C., Mallett made a name for himself as a maverick marketer at several software companies, culminating as vice-president of the consumer division at Novell Inc. (NOVL) Equal parts charming, cocky, and combative, he's known for the boundless energy that has earned him the nickname "Sparky" around Yahoo's purple-and-yellow Santa Clara (Calif.) offices.

He's a bit of an enigma. Inside Yahoo, he has established himself as a charismatic team-builder who is revered for his ability to keep everyone on the same page and the company's execution well-oiled. Outside, Mallett's feisty impatience has stirred up some criticism from analysts and business associates. One Wall Street analyst, for instance, gripes that Mallett will rudely interrupt if he doesn't like the line of questioning. "He'll just abruptly say, `Next question."' says the analyst, who requested anonymity.

In spite of the challenges stacked against him, Mallett is as confident as ever. He points out that competitors are falling by the wayside. The most recent flop: Disney's "This is our chance to grab market share," insists Mallett. "When I see other portals cutting back, I smell blood." He acknowledges that AOL Time Warner, with its broad family of online, print, TV, and movie properties, has tremendous pull with advertisers. But, he insists, "I'd much rather be in my chair right now. Our vision can be greater than AOL Time five or 10 years."

How so? Because Yahoo is independent and doesn't compete with traditional media companies like Bertelsmann or Reuters Group PLC (RTRSY), Mallett believes it's a more inviting partner--and a more potent media outlet--than AOL, which competes with some of these companies through its Time Warner assets. If Yahoo can turn its neutrality into a more robust array of online content than AOL's, viewers and advertisers will certainly follow. At least that's the theory. Mallett has reason to hope: In the past four months, Yahoo has landed Dow Jones (DJ), ABC News, and the National Football League as content partners.

This is the kind of uphill challenge that Mallett relishes. As a kid, he threw himself into sports. Despite being inches shorter than most teammates, he used his hustle to become one of the top young athletes in Victoria, an upscale city of 300,000. While Mallett was a stellar hockey goalie and a skilled catcher at baseball, he thrived at soccer. The speedy kid set scoring records in high school, earned a scholarship to the University of Victoria, and was eventually offered a tryout with the Portland Timbers of the now-defunct North American Soccer League. "It didn't matter to him that everyone was bigger. Jeff was absolutely fearless," says childhood buddy Scott Longpre.

Quick study. Mallett's innate talent as a leader showed up early. Thanks to his intensity and his confidence, he was the captain of most of his teams--and would prod teammates when they didn't do their best. When he was 12, his family moved about 30 minutes across town. But his coach, eager to keep his team's leader, offered to drive the half hour to pick up and drop off Mallett from practice. "For a 12-year-old kid, he had an unbelievable ability to orchestrate an entire team," says Mallett's father, Brian.

Mallett's passion for sports was overshadowed only by his zeal for business. When Mallett turned 10, his father and stepmother, Marilyn, converted their comfortable upper-middle class home into a command center for numerous family businesses, from a tea room to a powdered-milk distribution outfit to a motor-home rental company. Mallett immersed himself in the businesses, surprising the entire family with his knack for getting things done quickly and efficiently. One example: As a waiter in the tea room, he would take orders for large groups without writing anything down. By 16, Mallett ventured out on his own, selling home insurance after school.

Nothing has ever been handed to him. During the summers while attending college, he would work day jobs and serve drinks in a restaurant bar at night. When he took a year off to bum around Australia, he ran out of money and called his parents for a loan. No dice. "They said if I'm out of money, it's time to come home," recalls Mallett, who landed a job busing restaurant tables to prolong his trip. He has shown the same gritty work ethic ever since. Sometimes, if he comes back to the office from a business trip at 11 p.m., he'll work through the night.

"Not a tyrant." He's not all work, though. A devoted family man, Mallett sets aside time every Sunday for ice skating or going to the beach with wife Claire and two daughters, ages 6 and 3. He even squeezes in a couple of trips a year to Victoria to visit his 92-year-old grandmother. "He absolutely adores her," says longtime pal James Shypitka, who traveled with Mallett across the South Pacific.

While Mallett seems to have mastered the art of attaining inner calm at home, at work he's on a self-improvement quest. It's the "arrogant" thing. He's knows it's a problem and is trying to become more of a diplomat. "Sometimes my passion gets ahead of me. Koogle is really helping me work on my patience," he says. This has helped Yahoo win deals with big clients such as Compaq Computer Corp. (CPQ) The two companies resolved the financial terms of a complex advertising and computer purchase deal in just one day. "The whole tone of the negotiations was flexibility," says Jeff Clarke, Compaq's vice-president for finance and strategy in the sales division, who credits Mallett for making things happen. Based on things he had heard, he expected Yahoo to be hard to deal with, but "we were very pleasantly surprised."

That's Mallett's model for changing how the company is viewed in the business community. Priority One: revamping the way it sells advertising. When Yahoo burst onto the scene in 1994, it often had to skirt traditional advertising agencies that were slow to grasp the Net and go straight into customer boardrooms. If a customer wasn't ready to set up an advertising deal on the spot, usually at the terms Yahoo dictated, Yahoo would quickly move on--leaving hard feelings in its wake.

To help polish Yahoo's reputation, Mallett a year ago hired 30-year ad-industry veteran S. Murray Gaylord to cultivate agency relationships. Yahoo is trying to move sales from simple dollar negotiations to a consulting approach, spending months with critical advertisers in teaching them how to build brands via the Net.

Mallett's latest crusade is stoking the passion of Yahoo's workforce. With many employees' stock options under water, Mallett must sell the game plan more vigorously than ever. He's stepping up visits to satellite offices and holding regular Web conferences. He has even made the 2001 business plan required reading for the entire company. "[Mallett's] not a tyrant," says Tim Sanders, director of Yahoo's ValueLab Group. "He'll put his arm around you and ask, `How can I keep you motivated?"'

Mallett's own duties are gradually shifting. Although he's still primarily Mr. Inside, he is slowly taking on more jobs outside the office, like meeting with customers and potential partners. With Yahoo looking to beef up its veep-level talent with several new outside hires, possibly easing some of the operations burden, Mallett will only move further into the limelight. Whether he can rejuvenate Yahoo remains to be seen. But with a more visible role, one thing is certain: No one is likely to once again mistake Mallett for a junior marketing assistant anytime soon.

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