Yahoo's Bid To Think Small

An initiative dubbed Brickhouse aims to give entrepreneurial employees room to run

In Silicon Valley, being a big man on campus isn't always a bonus. Yahoo! Inc. (YHOO ) has learned this the hard way. The 13,000-employee company has found itself struggling against small startups to build the best next-generation Web features, tools, and community sites. In a few key cases, such as software for sharing photos online, Yahoo developed its own product only to eventually spend tens of millions of dollars to acquire tiny competitors that had done a better job of attracting the young and digital.

Now, Yahoo is trying to tap its inner startup. On Feb. 7 the company released Pipes, a service that allows Yahoo users to combine, or "mash up," data from various Web sites (mixing news feeds from Google (GOOG ) and Yahoo, for example). Even more ambitious is the initiative that gave birth to the idea. Pipes is the first product to come out of Brickhouse, a new division of Yahoo scheduled to launch officially around the beginning of March.

Brickhouse marks a dramatic break from Yahoo's usual way of doing things. Its 14,000-square-foot offices are located in the hip South of Market neighborhood in San Francisco, 40 miles away from Yahoo headquarters in strip-mall-laden Sunnyvale. The facility is bereft of Yahoo logos. Purple, the company's signature color, is noticeably absent. The staff is made up of employees with the kinds of ideas that, in theory at least, would have the venture capitalists of Sand Hill Road whipping out their checkbooks.

Teams are built around promising concepts. And the whole effort is led by a genuine star of the Web 2.0 movement, Caterina Fake, who co-founded the innovative photo-sharing site Flickr, which Yahoo acquired in March, 2005. "We've brought some bona fide rock stars into the group, of amazing talent and creativity," says Fake. "Brickhouse gives us the ability to capture all the cool, inventive ideas they've got and develop them."

Clearly, Yahoo would like to reclaim the reputation for Web innovation that Google Inc. (GOOG ) has usurped in recent years. The search giant, known for giving employees one day a week to work on their own projects, has seen its stock soar from 85 at its initial offering in August, 2004, to more than 460 now. Yahoo shares, meanwhile, are roughly flat over the same period. Google's market cap has gone from $23 billion at the IPO to $144 billion, leaving Yahoo far behind at $42 billion.

Outsiders question whether an incubator approach can turn that around. People who take jobs at a big company don't often have the big ideas—or risk-taking mentality—of an entrepreneur, says Todd Dagres, general partner at Boston venture firm Spark Capital. Financial considerations alone are a disincentive: If you develop an idea for Yahoo, Dagres points out, "you can't then sell it to Google for a billion dollars."

Brickhouse assumes that many Yahoo workers would develop great ideas if they weren't tied down by a day job. Bradley Horowitz, vice-president for product strategy, points to an experience stemming from Yahoo's Hack Day event last September, when employees and outsiders got a chance to tinker with the company's programs and develop new applications. One employee designed a tool that would leave behind users' fingerprints in the form of an image or profile. Yahoo executives realized the program could be useful to Web publishers, bloggers, and others curious about who is visiting their pages. But the employee had another assignment, and there was no easy way to free him up.

In January, Yahoo purchased for an undisclosed price a company called MyBlogLog that does basically the same thing except it has extra features, such as privacy functions that allow users to turn off the tracking.

Employee proposals will be vetted by Horowitz, Fake, and others. Horowitz says Pipes is a good example of the kind of transformative idea they're after. The technology was under wraps until bloggers, enlisted to test it, started buzzing about it. Yahoo was soon overwhelmed with interest. Now users are building search engines that pull in sites with bookmarks from the popular Web service, as well as feeds of New York Times photos and other things.

Brickhouse developers whose ideas succeed will receive additional compensation. Horowitz says the figure will be somewhere between a pat on the back and an acquisition-size bonus. "The idea is they would enjoy some upside," he says.

By Catherine Holahan

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