Yahoo's Boulevard Of Broken Dreams

Its effort to redefine online entertainment has been a surprising struggle

A year ago, Yahoo!'s ambitions in the media industry were nothing short of audacious. Yahoo! Inc. (YHOO ) execs spoke of creating smash-hit, medium-defining programming for the interactive world, a sort of I Love Lucy for the Internet. With former movie mogul Terry S. Semel as its CEO and former ABC (DIS ) television Chairman Lloyd Braun running the media outfit, Yahoo looked capable of achieving its aspirations. The company furiously set to work on a number of high-profile content ideas, from adapting the abandoned reality-TV show The Runner into a multimillion-dollar Internet program to developing a home-electronics reality contest, dubbed Wow House.

Today, after a turbulent year in the media business, Yahoo is singing a much more modest tune. Large projects such as The Runner are in a holding pattern as Yahoo susses out the potential business opportunities. Wow House has been sent back to the drawing board. And headline-grabbing content partnerships, which Yahoo once pursued with zeal, are increasingly ending up at competitors such as America Online, Google (GOOG ), and Microsoft's (MSFT ) MSN. A company that a year ago moved its media biz to Southern California and hired up a stream of Tinseltown execs is suddenly scaling back its Hollywood rhetoric. "It's fair to say we've had a shift in thinking over the past 15 months," says Daniel L. Rosensweig, Yahoo's chief operating officer.

It's the media education of Yahoo Inc. While rivals America Online Inc. and Google Inc. came on strong last year, Yahoo struggled to find its footing. Yahoo's original content endeavors, from celebrity blogs to the online reality shows, have fallen flat or been stuck in development. Web-traffic numbers have stalled on a couple of its media sites. And Yahoo's media group only hit internal financial targets last year after revising them downward, according to two sources familiar with the media group. "Things at Yahoo just get stuck in Never Never Land," says an executive at one of Yahoo's content partners.

Yahoo says its media group performed well and met expectations in 2005. It points out traffic to news, music, and games sites lead their categories, while movies ranked No. 2. "They did what we asked them to do and then some," says Rosensweig.

Making matters more difficult, Hollywood began wresting back control of its online fate last year. The studios started putting TV shows, sports clips, and animated spots on their Web sites rather than just turning them over to the Internet companies they increasingly see as competitors. When media companies are willing to share their content with Net players, they often want higher and higher fees. For companies such as Yahoo, whose investors have grown accustomed to fat margins, the increasing cost of content is a problem. "I don't want to create a model where we have to spend an enormous amount of money, but we haven't moved the needle on a long-term basis at Yahoo," says Braun.

Instead, Yahoo's media ambitions will focus more on its technology roots. While Yahoo's content crew struggled, its techies made big strides during the past year in harnessing the do-it-yourself media revolution taking place online. Yahoo has acquired a half-dozen tech startups focused on developing online communities, where people share everything from their browser bookmarks to music playlists. Yahoo's goal: to weave this community-developed content into all of its myriad media properties, from news to games to music.

One example of the new direction was Yahoo's recent video feed of Howard Stern's celebratory last day on FM radio. Not only did 4 million people watch the video streams, they also used other Yahoo offerings, including group discussions and music sharing. Sirius Satellite Radio (SIRI )Inc., the new home to Stern's show, purchased Yahoo ads.

This strategic retreat opens the field to competitors. NBC in February, for instance, partnered with and Google to showcase video clips of the Olympics.

One month earlier, Google partnered with CBS (CBS ) to include some shows, including Survivor, in its new video store. AOL, meanwhile, followed its exclusive online coverage of the Live 8 musical event in July with a deal to develop an online reality program, dubbed Gold Rush, with longtime Yahoo partner Mark Burnett Productions Inc.

A move by Yahoo last year helped cement Google as a contender in online content. When CBS in September sought a partner to distribute the premiere of Everybody Hates Chris, it first reached out to Yahoo, asking only for a link back to its site as compensation. When Yahoo balked, CBS took the deal to Google, giving the search leader its first significant content deal and driving millions of users to its site. Since then, Google and CBS have partnered on Google's video store as well.

Yahoo execs insist the deal didn't make sense for them. Although it will continue to compete for large content deals, Yahoo says it will only do so if it can add value. "It's not just about bringing people to the site, it's about keeping them engaged, enticing them to share and create their own content, and making sure they come back," says Braun.

Certainly, Yahoo has plenty going for it. The company boasts over 400 million visitors and a media division that streams more music videos than anyone else each month. But its reluctance to aggressively pursue outside content unless it can add its own twist could hurt its efforts to pull in advertisers. As brand-name advertisers look to shift more of their spending from television to the Internet, they're most enticed by video content with broad appeal. "MSN is considered the safe bet for video ads right now," says Matt Wasserlauf, CEO of ad seller Broadband Enterprises.

The man charged with striking this delicate balance for Yahoo's media offerings is 47-year-old Braun. In many ways, it's an odd role for the former ABC executive who made a name for himself developing megahits such as Lost and Desperate Housewives. Braun, a self-proclaimed tech neophyte, knew little about the Internet before joining Yahoo in November, 2004.

Despite a steep learning curve, Yahoo's brass say Braun is turning their vision into reality. They point to Yahoo's handling of the Olympics as a prime example.

ESPN and Google grabbed headlines by partnering with NBC. Yahoo, by contrast, set up its own Olympics site and packed it with headlines, exclusive columnists, and community-generated content, such as photos taken by spectators and posted on Flickr, Yahoo's photo-sharing service.

There could be costly casualties as Yahoo gets its arms around this evolving strategy. One of Braun's earliest pet projects was resuscitating The Runner, which features a stealth operative traversing the country with hidden video cameras. Online viewers watch the programs, search online for clues, and attempt to capture the runner to win a prize. But uncertainty about how to recoup the hefty filming costs, estimated at between $5 million and $10 million, put the show in limbo.

Then, in January, AOL began holding quiet conversations with Burnett & Co. about a different reality concept. Within 10 days, the two sides had hammered out details for Gold Rush, an online treasure hunt of sorts. Now execs from Burnett and AOL are teaming up to market the program to potential advertisers. A Hollywood partner who had been in lockstep with Yahoo since 2004 is now rolling the dice with one of Yahoo's biggest rivals.

Braun and Yahoo's other execs argue that they're right to take their time in evaluating the reality concepts. Once they're sure the model is right, they'll forge ahead. It's a stark change for Yahoo's media division. Cockiness has been replaced with caution.

By Ben Elgin

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