Yahoo: Bringing Geeky Back

Under CEO Jerry Yang's direction, the Web portal is trying to return to its tech roots and shift away from being a media catch-all

From the outside, it might not look like much has changed at Yahoo! (YHOO) since Jerry Yang took the reins as chief executive in June. Yahoo hasn't engaged in the massive layoffs some analysts deemed necessary. Nor does Yang appear to be considering Wall Street's other, more radical suggestions, such as ceding control of the company's search advertising business to Google (GOOG) or slicing Yahoo into smaller, more profitable chunks. And despite a long-rumored interest in Facebook, Yang has yet to acquire a stake in the social network.

But business is anything but usual under cofounder Yang, who's trying to return Yahoo to its roots as a technology company in the wake of efforts by predecessor Terry Semel to build a media empire. Yang is aiming to transform the culture, making Yahoo a place that encourages innovation, faster product development, and increased collaboration with outside Web sites and developers. "Jerry gets when technology rules apply and when media rules apply," says Vish Makhijani, senior vice-president of Yahoo Search. "There is more spring in the step from the technology folks here." When Yahoo releases third-quarter results Oct. 16, the shift is likely to be the focus of questions from analysts and media, eager for a progress report on a 100-day review promised by Yang in July.

A Tech Relaunch

Yang underscored his reemphasis on tech in September, when during a meeting with executives he pledged to foster an environment that makes it easier to launch new products. He put a fine point on his message by inviting Apple (AAPL) Chief Executive Steve Jobs to address the several-hundred person crowd. Semel, by contrast, had invited actor Tom Cruise to speak to Yahoo leaders in past meetings. The Jobs appearance came a day after Yahoo announced plans to "streamline" its entertainment business in Santa Monica, Calif., in order to free up resources for "the development of next-generation platforms, applications, and services."

To that end, Yang is making it easier for outside developers to work with Yahoo. Following the lead of younger Web companies, such as Facebook, Yahoo is releasing the so-called application programming interfaces (APIs) that enable programmers to create programs that can be embedded on Yahoo pages. Already, the company has opened up the source code to Yahoo Mail (, 9/11/07), allowing third-party developers to create small programs that work with users' address books and other services.

Yahoo also is working with partners to create mini versions of their sites or programs that can be installed on Yahoo users' personalized home pages. Matt McAlister, director of Yahoo's Developer Network, said in an e-mail that he's "never been more optimistic about the future of the company," thanks in large part to these developer initiatives. "I think Yahoo is focusing on the right things and moving in a very positive direction," he added.

Under Yang, Yahoo also has made acquisitions focused on improving how its technology works. On Sept. 17, Yahoo acquired e-mail, calendar, and Internet calling service Zimbra for $350 million. "Zimbra offers incredible technology," said Brad Garlinghouse, Yahoo's senior vice-president of communications and communities, in a blog post after the acquisition. Earlier in September, the company acquired advertising network BlueLithium for $300 million, a move that could help Yahoo bolster its data-analytics tools.

Overturning "Innovation Constipation"

Yang is drawing on his background as a Stanford-trained engineer to galvanize the rank and file and make Yahoo a safe place to be a geek again. It's a tall, much-needed order. Semel made Yahoo into the online media giant it is today in part through his own reengineering of its culture. The Warner Bros. veteran pushed employees to focus on profitability, sealing lucrative business deals and securing the kind of content capable of attracting large audiences and advertisers—instead of toying with unproven technology ideas.

Though Semel's discipline proved just what the company needed at the time, Yahoo employees say the company is now overly cautious when it comes to launching new products or experimenting with concepts that do not have a proven business model. McAlister describes Yahoo's problems as "innovation constipation" and "analysis paralysis." In a blog post last year, McAlister wrote that the company concentrates too heavily on identifying "all the potential pitfalls" of any decision and not enough time creating solutions. "Few people are willing to take a loss on one product or strategy on the chance that another one might yield a brighter future. The result is a wait-and-see approach," wrote McAlister. "That's a shame given the incredible potential here."

Socially Awkward

Many inside Yahoo have blamed that caution for its recent struggles. Competition is hammering Yahoo in the very areas where its own innovation is falling behind. Take Web search. Google has one-upped Yahoo in matching ads to search results, developing a significantly more profitable system. Yahoo also missed opportunities in social networking. With roughly 12,000 employees, including an army of engineers, Yahoo had the necessary resources to develop a vibrant social network long before Facebook or MySpace (NWS). Instead, it launched Yahoo 360, its social networking offering, in 2005, nearly two years after MySpace was founded. The service never really took off.

In September, the company launched an invitation-only trial of a new social networking site titled Yahoo Mash. "We have gone from self-admittedly having made missteps in the social space," says Yahoo's Garlinghouse, author of the critical internal document dubbed the Peanut Butter Manifesto that prompted louder calls for a shakeup. "This has been an area where we need to execute more effectively."

Turnaround Plan in the Works

Analysts question whether Yang can execute on his vision. "People just don't have the confidence that future growth will be as much as Google," says Jason Helfstein, an Internet analyst for CIBC World Markets. "They are not really sure that Yahoo can do much to get share back." Yahoo employees seem willing to give Yang the benefit of the doubt. Numerous executives interviewed in recent weeks said Yang's presence has inspired confidence across the company. "People believe in Jerry," says Garlinghouse. Adds Tapan Bhat, Yahoo's vice-president of front doors: "There is a tremendous amount of energy now."

Despite such moves, few are willing to proclaim Yahoo a changed company. Indeed, Yang was still a top executive while Semel held the CEO seat, prompting some to wonder what took him so long to agitate for change. And the company has made efforts to innovate throughout its history. Yahoo holds multiple "Hack Days," events where employees are encouraged to play around with Yahoo's systems and develop new features. Earlier this year, Yahoo launched Brickhouse, an ideas incubator dedicated to fostering the creation of innovative products. "Yahoo is still in the midst of developing its turnaround plan," said UBS (UBS) analyst Ben Schachter in a note to investors prior to Yahoo's earnings call. "There remain difficult operational issues."

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