Yahoo's Brilliant Solution

By figuring out how to make brand advertising work online, Terry Semel is on the verge of creating the 21st century's first media giant.

By Fred Vogelstein

August 19, 2005

Julie Roehm has more than $2 billion to spend this year, and the way she's been spending it worries executives at News Corp., the Washington Post Co., and virtually every other media company on the planet. As Chrysler's director of marketing communications, Roehm, 34, oversees a budget that Advertising Age ranks as the sixth-largest pool of ad dollars in the nation. She decides how many minutes of the carmaker's commercials appear on networks and cable channels nationwide and how many pages of its ads turn up in magazines like this one and newspapers such as USA Today. Here's the scary part: Roehm rarely misses a chance to talk about how delighted she is with online advertising. Last year she spent 10% of the budget online; this year she is allotting closer to 18%; next year, she says, she will allocate more than 20%. Do the math: In 2006 roughly $400 million of Chrysler's money that used to go into TV, newspaper, and magazine ads will be spent on the Internet. Says Roehm: "I hate to sound like such a marketing geek, but we like to fish where the fish are."

No wonder media executives are concerned. One of their headaches is Googlemania—Google effectively reinvented online advertising with the targeted, classified-like text links that you now see everywhere. Soaring profits from selling those ads have helped drive Google's stock market capitalization to some $85 billion, making Google the most highly prized media company in the world. But while the old guard is keeping a watchful eye on Google, the company it really fears—and the one advertisers like Roehm increasingly love—is Yahoo.

It's been easy for most people to overlook the media and advertising juggernaut that Terry Semel, Yahoo's CEO, has assembled since he arrived from Hollywood four years ago. That's partly because Semel makes himself easy to overlook. He's not a showman like Apple's Steve Jobs or a high-tech rock star like Google's Larry Page or Sergey Brin. In fact, he seems to work hard at being bland. Listen to him theorize about the online revolution: "The great part about the Internet of all the existing mediums from before is that it's the first one that is truly global, and its impact is massive." Caffeine, anyone? Semel doesn't care if he's boring. Like many good negotiators, he knows that the more he says publicly, the less he's likely to win. Twenty years of doing movie deals as co-CEO of Warner Bros. taught him that. At 62, Semel's a behind-the-scenes guy, a strategist with a bold master plan: to transform Yahoo into the 21st century's first media titan. He has surrounded himself not with nerdy brainiacs but with veteran advertising and media executives adept at building bridges to the powerful businesses that feel the most threatened by the Internet.

So far, Semel has put together one of the web's hottest winning streaks. When he took over in 2001, the Sunnyvale, Calif., portal—founded in 1994 by Jerry Yang and David Filo—was a mess. The dot-com bubble had burst, revenues had fallen by half, and red ink flooded the bottom line. As the founders took a back seat (today Yang acts as the resident visionary, and Filo works in IT), Semel and his enforcer, COO Dan Rosenzweig, set about diversifying sales beyond the banner ads Yahoo had lived off. He added search advertising, online classifieds, and a host of commission-generating businesses such as selling SBC and Verizon broadband subscriptions. The moves transformed a money loser into a $3-billion-a-year company that this year will post operating income in excess of $1 billion—a near-Microsoftian operating margin of some 30%. (By comparison, Google is about the same size, but its margins are almost double.) Today Yahoo arguably offers the online world's broadest array of information and entertainment for users, married to the web's most sophisticated collection of offerings for advertisers. Each month more than 430 million people worldwide typically visit one of its myriad sites.

Until recently Semel's grand plan was missing a crucial strand: widespread use of online advertising by big marketers like Chrysler. Burned or disillusioned by the bubble, they questioned whether online advertising would ever match the effectiveness of commercials or print ads. Sure, Google's text ads work, because you throw them in front of users just as they are looking to buy or research something online—like a smart, aggressive yellow pages. (MSN and Yahoo's search ads work the same way.) But using the Internet to sell "that Pepsi feeling"—creating and fostering an emotional attachment to a brand—was a challenge of an entirely different order. Most marketers doubted that it could be done.

But lately decision-makers like Roehm are seeing the Internet in a new light. Their conversion can be explained in one word: broadband. Roughly a third of U.S. households now have high-speed Internet connections, which has done two things that advertisers like. It has caused the average time Americans spend online to grow 50% since 2001, according to Knowledge Networks, a Menlo Park, Calif., research firm. Surfing the Internet now takes up 15% of the time Americans spend with all media, it says. (That's conservative, say Forrester Research and many advertisers, who believe the number is double that.) Second, instead of handcuffing advertisers to the banner ads of the bubble years, broadband has freed them to fashion creative messages that are more like TV commercials.

In a May report Forrester surveyed 99 major advertisers and 20 ad agencies and found that nearly 85% of them planned to expand their online ad budgets this year. More significant, it reported a radical shift from the belief that brand building and the Internet don't mix. Sixty-three percent of those surveyed said that online advertising was a brand-building tool "equal to or better than" advertising on TV or in print. Anecdotal evidence supports that. Not a week goes by, it seems, without a big advertiser—P&G, Pepsi, and Georgia Pacific are recent examples—announcing plans to expand promotion of its products online. The trend means that a huge volume of brand advertising will flow into the online world—$8 billion to $12 billion a year by 2010, depending on whom you ask, up from less than $5 billion now, about 3.5% of total U.S. spending on brand advertising.

For Semel and Yahoo, that is the best possible news. Although Google leads the pack in the $5-billion-a-year market for search-related ads, Yahoo is increasingly competitive there. And in the scrum for online brand advertising—almost as large a market—Yahoo is poised to grab the biggest share. Its 181 million active registered users are probably the largest online clientele, which means Yahoo can tell advertisers it knows the habits of more users than any other portal—or any traditional media company. In contrast, Google never trained its users to register and has only recently started to ask them to sign up for services like e-mail or blogging. What's more, measured by page views—the indicator that brand advertisers watch most—Yahoo users are the most engaged. Yahoo generated nearly twice as many page views—178 million worldwide in May—as its nearest competitor, MSN. (MSN generated 96 million page views in May, Google 68 million, and AOL [which, like FORTUNE, is owned by Time Warner] 39 million, according to Comscore Media Metrix.) Says Brian McAndrews, CEO of Aquantive, one of the largest advertising firms specializing in Internet distribution: "Yahoo's opportunity is massive." And while its online rivals are ramping up to attract brand advertising too, Morgan Stanley Internet analyst Mary Meeker says the advantage right now is Yahoo's: "If you're new to online advertising (and a lot of big advertisers are), Yahoo is your first call because they do everything."

The woman Semel has hired to go after brand-advertising dollars is no one you would expect to find at a tech company. Wenda Millard, Yahoo's 50-year-old head of ad sales, looks and acts like the publisher of a fashion magazine. She talks about the importance of "engaging" and "delighting" users, about "relationships" and "building trust" with advertisers. And she does it in an even, mellifluous purr that is both reassuring and utterly persuasive.

No wonder: Before jumping in 1996 to DoubleClick, the once-powerful Internet ad-processing company, and then to Yahoo in 2001, Millard spent 20 years in the magazine business. She started out selling ads for Ladies' Home Journal and New York magazine. By 38 she was publisher of Family Circle, making her one of the industry's youngest publishers and the first woman to run a major women's magazine. Though she works for Yahoo, she is based in New York City, and is unapologetic about her old-media ways. Indeed, she—and many others—thinks they are her greatest asset. "When you're asking a major marketer to spend hundreds of millions of dollars on a new medium, they want to trust you," she says. "If I didn't have a relationship with the presidents of all these FORTUNE 1,000 companies or the heads of all these agencies, why would they trust me?"

Remember, during the bubble the Internet portals, including Yahoo, thought their sites would forever be in such demand that they could cut ad agencies out of the loop and take orders directly from advertisers by e-mail. They viewed media's traditional lunching and golfing with advertisers and their agencies as a waste of time. That arrogance backfired when the bubble burst, and portals became persona non grata on Madison Avenue.

Millard was the first to make peace. Because of her background, she recognized the importance of agencies as gatekeepers for big advertisers and reinstated them as partners. McAndrews of Aquantive says that earned her lasting credibility with him and other middlemen.

By 2003, advertisers and agencies were starting to respond to Yahoo's broad reach, diverse ad offerings, and deep knowledge of its users. Today Yahoo is where Dave Burwick, chief marketing officer at Pepsi-Cola North America, spends the biggest chunk of the nearly $20 million that he has allocated to online advertising (about 5% of his total budget). He's so enamored of Yahoo's "progressive view of where its medium is going and willingness to experiment" that last month he decided to shift his company's two-year-old Pepsi Smash music video series from the WB television network to Yahoo. The Internet brings Pepsi a larger audience of teenagers, he says, enabling them to watch its videos when they want and to interact with one another and with Pepsi via instant messaging.

Roehm too spends the biggest chunk of her online dollars on Yahoo. She says that Yahoo gives her the most information about how the advertising performs, allowing her to slice and dice the effectiveness of every dollar she spends. "We marketers are much more obligated to tell our shareholders and our management what the real return on our spending is. Online provides us the opportunity to give a real answer to that question," Roehm says. "It's measurable. It allows you to have a one-on-one, two-way dialogue with your customers." She knows that almost every dollar she spends online generates $1.50 or more in sales for Chrysler. Although she doesn't have a comparable figure for her spending on TV or in print, her gut, says Roehm, tells her online is a lot better.

Not only can Yahoo provide Roehm with extremely detailed demographic information about the people who click on her ads, it can also predict the probable response rate to the ads on each segment of the portal. It can predict what time of day the ads are likely to be most effective. And increasingly, by analyzing "click streams" on its network, Yahoo can spot potential buyers at various stages of the consideration process. In other words, by looking at the billions of user clicks that flow through its servers every day, Yahoo is getting better and better at figuring out that a given pattern—say, a user who's looked up football on Yahoo Sports, checked out adventure movies on Yahoo Entertainment, and compared truck prices on Yahoo Autos—means the browser is interested in buying a Jeep and is just beginning to think about a purchase. Another pattern might mean a user is interested in minivans and is just a few days from buying. Such information is hugely valuable, says Roehm: Once Yahoo knows where a potential customer is in the car-buying process, it can serve up the appropriate Chrysler ad.

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