April 29, 2003 4:00 AM PDT

Sweet Semel of success

When Terry Semel became Yahoo's CEO two years ago, many people wondered why a former Hollywood studio head would join a crumbling business in the suburban sprawl of Sunnyvale, Calif.

Who guessed he wanted to build a media empire?

Semel, a Silicon Valley outsider with no previous experience in advertising, was once seen as a risky choice to lead a turnaround at a company that had helped define the dot-com era. No more.

After plunging off of a precipice at the end of 2000, Yahoo is on the rebound. The company this month announced its fourth straight quarter of profits and raised its outlook for the year, citing renewed strength in its core advertising business as well as growth in new nonadvertising related services. If it hits its numbers, Yahoo's revenue for 2003 will nudge past the company's record of $1.1 billion, set at the height of the dot-com bubble.

"I had no idea what he thought he was doing at that point in his career," said one executive at a major media company who spoke under the condition of anonymity. "But he's shown that he's an accomplished businessman. He's not just one of those, 'I can make movies' kind of guys. He's shown the world that he's the real deal."

Two years after taking the helm at Yahoo, the whispers behind Semel's back have largely been silenced.

The former Warner Bros. chief has guided Yahoo with a "results-speak-for-themselves" attitude, bringing a low-key manner to the job that offers a marked contrast to the hype-driven cultures that flourished during the Internet boom. Semel, who rarely meets with the media, declined to be interviewed for this story.

More on Yahoo's drive to survive
His approach at first left some people worried that he might not move aggressively enough to address Yahoo's problems. But now many believe the record he has built speaks for itself.

"He is much better than people had expected and much better than apparent, because his style is a low-key style with gradual execution," said Safa Rashtchy, an equity analyst at US Bancorp Piper Jaffray.

Placing his bets
Under Semel's leadership, Yahoo has fallen into closer step with the plain old media companies that its management once disparaged during the boom. He has brought focus and discipline to the company's once sprawling divisions and installed veterans in key positions, such as advertising sales.

If Semel has tightened Yahoo's sails, however, he's done nothing to trim the company's ambitions.

Since his arrival, Yahoo has been busy entering new businesses through an array of acquisitions and partnerships, including a broadband marketing deal with SBC Communications and buyouts of online employment site HotJobs and of the key search assets of Inktomi.

Semel's stewardship
After a slow start, Yahoo CEO Terry Semel is credited with turning around the struggling Internet pioneer. Here are some key metrics of his tenure since early 2001.

Stock price:
Up 24 percent

Unique users:
Up about 11 percent

Active registered users:
Up 33 percent

Advertising revenue:
Up 27 percent

Revenue diversification:
Nonadvertising revenue up 300 percent

Acquisitions:
Inktomi search assets

Online jobs site HotJobs

Launch Media Internet radio service

Partnerships:
British Telecom (broadband distribution)

SBC Communications (broadband marketing)

Overture Services (paid-search extension)

New services:
Search service update

Yahoo Platinum video service

Launchcast Plus music subscription service

Yahoo Mail Plus

Key personnel changes:
Former Yahoo CEO Tim Koogle announces that he won't stand for re-election on board of directors (April 15, 2003)

Venture capitalist and early Yahoo founder Michael Moritz steps down from board, replaced by Activision CEO Robert Kotick (March 7, 2003)

Daniel Rosensweig is appointed chief operating officer (April 24, 2002)

Gary L. Wilson and Ronald W. Burkle join the board (Nov. 14, 2001)

The bout of deal-making may have only just begun. In a brilliant financial stroke this month, Yahoo boosted its war chest to more than $2 billion through a $750 million convertible bond issue, under terms that effectively granted the company free money for five years.

The message seems clear: Semel is getting ready to play some serious offense.

After a slow start, it has become increasingly apparent that Yahoo is now Semel's show. Since arriving at Yahoo, he has consolidated his influence and moved handpicked people into key company positions, while moving out much of the old guard.

His sway can be seen in the board of directors, which now includes Southern Californians such as supermarket magnate Ron Burkle and former Walt Disney Chief Financial Officer Gary Wilson. Gone, meanwhile, are members from the previous regime, including former CEO Tim Koogle and founding member Michael Moritz of Sequoia Capital.

Fears that Semel might not "get" the Internet have steadily faded. Since his first public discussion of his turnaround strategy in November 2001, the initiatives he earmarked as the benchmarks of his tenure have begun to pay off.

Perhaps the biggest win for Semel thus far has been Web search. Once considered a commodity, Web search has become a highly profitable business for Yahoo and its competitors, which include Google and Microsoft's MSN. Yahoo's agreement with Overture Services, which pays Yahoo a fee every time visitors click on its commercial search results, added--by some estimates--about $45 million last quarter to Yahoo's coffers. Many attribute Yahoo's profitability streak to the cash windfall offered every quarter through the Overture deal.

Last December, Yahoo announced its acquisition of search technology provider Inktomi. The plan is to integrate Inktomi's paid inclusion links--which lead to companies that have handed over a fee for placement--into Yahoo's algorithmic search results.

The acquisition was an admission of Google's growing influence as a Web search powerhouse, a title that Yahoo once owned. Up to now, Google has been powering Yahoo's Web search results, but that may change. While Yahoo executives remain vague about Google's role once Inktomi is integrated, dropping Google remains one option under consideration.

Other business areas, such as nonadvertising, have seen revenue climb. Yahoo in April said its for-pay premium services reached 2.9 million subscribers, up from 2.2 million the previous quarter. (These premium services include the digital subscriber line, or DSL, service offered with SBC Communications; online personals; and e-mail storage.) Although the idea of selling Web services continues to be questioned, given the proliferation of the medium's free nature, Yahoo's conversion of free users to paid users continues to grow.

Divining the future
While Semel's tenure has been marked by a drive to cash in on the millions of Web surfers passing through Yahoo, it's still unclear where the company stands amid the ongoing sea change to broadband.

Throughout its brief history, Yahoo has maintained a role as Switzerland on the Web, banking on its brand and viral growth to attract new users. As more households upgrade to broadband, Yahoo and its chief competitors America Online and MSN are trying to find their place among the cable and phone companies selling high-speed access.

AOL and MSN have more to lose, given their sizable population of narrowband subscribers. But like AOL and MSN, Yahoo has expressed confidence that broadband providers will need their content to package with access. However, Yahoo has yet to strike a deal to bundle its services with a cable provider.

Comcast, the largest U.S. cable company, has expressed interest in building out its own content offerings, according to published reports. This raises questions about whether access providers really need third-party content and services to help attract subscribers.

Yahoo has taken steps to tap into broadband, as evidenced in its launch of Yahoo Platinum, a subscription-based multimedia streaming service. In addition, it plans on launching Yahoo Plus, which packages an array of premium services for one subscription rate.

For now, the company is banking on its relationship with SBC for DSL access. The deal allows Yahoo to grab a cut of subscription revenues from SBC while offering users access to its premium services. But the company has admitted that it is unlikely to replicate this type of deal with other providers.

Running his own show
With all of these accomplishments under his belt so far, the coming years for Semel will hinge on how well he can shepherd the company through uncharted territory.

Earlier this month, public filings disclosed that Semel received a salary of $450,000, an increase of 45 percent, and a cash bonus of $895,000. He also received 2.8 million additional stock options on top of the 10 million options offered during his hiring and an additional 1 million share bonus last year. Though his salary is closely tied to Yahoo's stock price, Semel recently reined in options granted to employees, reducing them from 5.6 percent of the company's outstanding shares--their level when he joined--to a projected less than 2 percent in 2003. The average among technology firms was 6 percent last year, according to Yahoo.

Semel's compensation is dwarfed by the wealth he amassed during his time at Warner Bros., leading some to compare his motives to those of other media moguls--such as USA Interactive CEO Barry Diller and Viacom president Mel Karmazin--who still fight in the trenches, despite the comfort of their fortunes.

"I think it's entirely fueled by ego," said the media executive speaking under anonymity. "If you think about it, why else would they do it? Because they want to show everyone else they can."

 

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