More bad news for Yahoo
Business Week: May 21, 2001
Cover Story
Inside Yahoo!
The untold story of how arrogance, infighting, and management missteps derailed one of the hottest companies on the Web
The first sign that the game had changed for Yahoo! Inc. (YHOO) came just days after its stock hit an all-time high--of $237.50. On Friday, Jan. 7, 2000, when Yahoo's staff was winding down for the weekend, a phone call came in to the third-floor executive cubicles. On the other line: an investment banker with a juicy tip that chief rival America Online Inc. (AOL) was about to buy old-media giant Time Warner Inc., a deal that ultimately went through for $85 billion in stock. The move would rearrange the planets in the media universe--and rock Yahoo's world.
The next morning, CEO Timothy A. Koogle, President Jeffrey Mallett, and co-founder Jerry Yang held a council of war in a purple-and-yellow conference room at the company's Santa Clara (Calif.) headquarters. Should Yahoo stick to its guns and remain an independent assembler of news and entertainment supplied by others? Or should it take advantage of its $110 billion market cap to make an old-media purchase of its own? Koogle favored staying the course, saying Yahoo had a better chance of lining up quality content if it teamed with all comers instead of buying one big media company. Mallett said later that he was ``torn.'' After four hours, a pot of Koogle's bitter coffee, and umpteen squiggles on the white board, the trio reached consensus: They would not follow AOL's lead. All of Yahoo's chips would remain on the Net.
It was Yahoo's first big mistake--and a presage of what was to come. Over the next 13 months, Yahoo's management troika, the ``Three Amigos,'' would commit a series of blunders that would downgrade the No. 1 Internet portal from powerhouse to Milquetoast. Corner-office intrigue, consensus management in gridlock, a souring economy, and plain old bad judgment would conspire to send Yahoo's revenues plummeting 42% in the most recent quarter, to $180 million. Yahoo's market cap is $11 billion, down 92% from its high. The company has ordered its first-ever layoff--some 400 people. And 3,100 remaining workers are saying good-bye to Koogle, their longtime leader, who was pushed out two months ago.
Worse yet, Yahoo's problems can't be fixed by a little cost-snipping and an upsurge in the economy. Its reliance on advertising revenues has turned into a liability as dot-com advertisers die off like mayflies and corporate advertisers pony up 50% less for online ads than they did a year ago. Meanwhile, AOL Time Warner boasts a $221 billion market cap and controls a vast empire of online properties, magazines, movie studios, and book publishers. Its advertising and commerce revenues rose 10% last quarter.
Today, Yahoo's fate rests with Terry S. Semel, the former co-CEO of Warner Bros. who took over on May 1. He has set aside 60 days to figure out what to do. Then, analysts say, he'll shake things up. Semel is considering bringing in a couple of lieutenants from his Tinseltown days, including James Moloshok, an ex-Warner Bros. man, says an executive close to the discussions. The new team's job is twofold: to convince advertisers Yahoo can deliver a solid return for their money and to reduce Yahoo's dependence on those ad dollars. Semel is likely to speed up forays into newer sources of revenue--including its premium subscription services for consumers. Analysts are looking for nonadvertising revenues to increase from 10% of the total last year to about 25% in 2002.
Semel is betting heavily that he can turn the company around. In an unusual move, he plunked down more than $17 million of his own money to buy 1 million shares of the company's stock. Moreover, he signed an equity-heavy package that gives him just $300,000 in salary. Many of his stock options are priced at or above the price when he joined. So he must make dramatic improvements to collect on his bet. ``I have a strong conviction about Yahoo's ability to leverage its core assets into a successful global company,'' he said after being appointed to the job.
Can Semel do it? It's a long shot. As a 21-year Warner Bros. veteran who left Time Warner in 1999, he earns kudos for running the movie business, where he was responsible for megahits such as the Lethal Weapon series. But Semel failed to deliver when his duties were expanded to include Time Warner's music and amusement-park businesses. He didn't turn the company's Web sites into moneymakers. And he has little experience with advertising. ``Semel's not a turnaround expert. And he doesn't know how to sell to large advertisers,'' says analyst Scott Reamer of SG Cowen Securities Corp. Semel responds that he has extensive experience running a media company, and that's what matters.
Semel's most daunting challenge will be rebuilding Yahoo's dysfunctional management team. In a surprise move, Koogle was pushed out of his CEO job on Feb. 27 by the board of directors, who also passed over Mallett to seek a CEO from outside. Insiders say Koogle had taken a 30,000-foot view: He acted as chief visionary, distancing himself from operational chores and losing touch with the market. He misjudged how badly the dot-com implosion would hurt the company.
At the same time, Mallett, who was running daily operations, was angling for the CEO job. An operations whiz, he was growing more frustrated with Koogle's consensus-style management and his lack of involvement. ``He felt like he was dog-paddling with one arm tied behind his back,'' says a former Yahoo executive. Mallett, 36, began telling people he would ``move up'' shortly, says a job candidate who talked to him. And seasoned execs, who could challenge Mallett's influence, were blocked from critical roles. Tension mounted between Mallett and Koogle. What seemed on paper a good match--of a big-picture CEO and a nuts-and-bolts president--turned into a toxic brew.
Emerging from the melee stronger than ever is co-founder and board member Jerry Yang. While Yahoo's ``professional'' managers, Koogle and Mallett, were blamed for Yahoo's slip-ups, Yang's image as Yahoo's goodwill ambassador has shielded him from criticism. He also has the ear of Masayoshi Son, CEO of Softbank Corp., which owns 21% of Yahoo's stock and has a representative on the board. Yang, along with board member Michael J. Moritz, a grizzled venture capitalist at Sequoia Capital who was Yahoo's first backer, spearheaded the decision to replace Koogle and pass over Mallett, say insiders and several outside sources close to the board. They then orchestrated the hiring of Yang's buddy, Semel.
Yang, Koogle, and Mallett were precisely the ones who led Yahoo to its early success. In less than six years, they transformed the company from a simple directory of Web sites into the best-known brand on the Web, with $1 billion in annual revenues and more than 190 million monthly visitors worldwide. At its peak, on Jan. 3, 2000, the company's market cap was $128 billion, more than twice that of media giant Walt Disney Co. (DIS)
Now, Semel must find a way to restore Yahoo to its former stature. To grasp just how difficult that will be, it's important to understand how the upstart ran aground. Koogle and Moritz would not comment for this story, and Yang, Mallett, and Semel would talk only about the company's business prospects. But through interviews with 20 current and former executives and well-placed sources outside the company, BusinessWeek has reconstructed Yahoo's slide. Here, for the first time, is the inside story behind Yahoo's meltdown:
MISTAKE NO. 2
Less than three months after Yahoo balked at an old-media acquisition, it got a second chance to alter its fate. Again, it blew it. Seeking to beef up its e-commerce revenues, Yahoo began negotiating to buy Web auction leader eBay Inc. in late March, 2000. But as acquisition talks heated up, so did Yahoo's internal politics. Koogle wanted the deal. But Mallett was concerned about having eBay CEO Margaret C. Whitman in Yahoo's executive lineup, say eBay (EBAY) insiders. Whitman wanted to report directly to Koogle, say the insiders, while Mallett insisted that eBay's CEO report through him. Koogle and Mallett also differed on the strategic importance of the deal. ``Tim could see the wisdom of challenging the Yahoo culture through a deal with eBay. Others were more threatened,'' says Robert C. Kagle, a venture capitalist on eBay's board.
With the deal looming, Mallett went on the offensive, according to sources close to the negotiations. He appealed to co-founders Yang and David Filo, trying to convince them that the eBay culture would be a poor fit for Yahoo. Soon, both founders were in his camp. Filo sent an e-mail to Koogle, urging him to back away from the deal. ``The whole thing got very dysfunctional. They were clashing,'' says a source close to the negotiations. With Koogle outnumbered, the potential deal unraveled. ``This was Yahoo's most fundamental problem. It was always management by persuasion, not management by dictation,'' says former Yahoo manager Rich Rygg.
And Yahoo paid for it. While Yahoo's fortunes have flagged, eBay has emerged as a rare dot-com success story. In the first quarter, eBay's revenues jumped 79%, to $184 million, and its net income hit $21 million. If the merger had gone through, Yahoo would no longer have to rely on advertising for 90% of its revenues, and rather than losing $11 million last quarter, it would be profitable.
TURNING A BLIND EYE
How could things like this happen? Call it the arrogance of success. The Three Amigos felt invincible and had little incentive to seek talent or advice from outside their brain trust. Seemingly with good reason. While other ad-supported sites began to struggle with the slowdown in dot-com budgets, Yahoo blew past revenue estimates quarter after quarter. A leading Web property such as Yahoo, it appeared, could withstand just about any shellacking to the Web advertising market.
The company made no special effort to make traditional advertisers see the value of creating a presence online. It was accustomed to getting the rates it asked for, cutting a deal, and then moving on. ``We ran Yahoo to optimize market share. I make no apologies for that,'' Mallett said in a January interview. ``If there was a company that didn't get it [Internet advertising], we moved on very quickly.''
Even big potential clients got the brush-off. Consider OgilvyInteractive, which handles online media buying for mammoth customers such as IBM. They held a meeting with Yahoo in early 2000 to explore an advertising relationship. The Ogilvy executives, however, were more interested in buying some advertising six months out, instead of right away. So the relationship disintegrated. ``They were more interested in the here and now,'' says Jeannette McClennan, president of OgilvyInteractive North America. She notes, however, that Yahoo has become more accommodating in recent months.
Yahoo's take-the-money-and-run style, along with its dearth of media veterans, prevented it from spotting fundamental changes in the Net advertising market. As the summer of 2000 wore on, the biggest traditional advertisers began looking for online marketing ideas beyond Yahoo's banner ads, which elicited less and less interest from consumers--even as Yahoo's audience continued to grow. These corporations wanted ad campaigns integrating the Internet, TV, and radio. The soon-to-be-merged AOL Time Warner could offer that. Not Yahoo. |
