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

[Continued, page 2]

As advertisers flock to Yahoo, media companies that supply it with content are increasingly upset. Indeed, if anything threatens Semel's vision of the 21st century's first media giant, it's the growing irritation of the giants of the 20th century. That's because Yahoo produces relatively little content of its own—it's an aggregator vulnerable to being cut off if old media become angry enough.

Old media's worries are legitimate. While declines in TV ratings and newspaper circulation accelerated last year, Yahoo's traffic, as measured in unique users, grew 24%. The fear that Yahoo will wreck their business model is especially acute among newspaper and TV-news executives. Yahoo's success "has become a red-meat issue," says Tom Curley, CEO and president of the Associated Press. "If there were an enemies list, [Yahoo] would be front and center." Donald Graham, chairman and CEO of the Washington Post Co., was probably the first to see Yahoo as a rival, says Curley, but now he hears it regularly from publishers who sit on his board of directors.

It's easy to see why. Just look at Yahoo News, the company's second-most-visited page after Yahoo.com. Yahoo News attracts 4.6 million visitors a day on average, according to Comscore, about the same number of people who read the New York Times every day. USA Today, the nation's largest newspaper, says its readership is 5.6 million. Add in all the people who get their news via Yahoo's myyahoo pages—which users program for themselves, mixing and matching from a seemingly limitless array of news, weather, finance, and entertainment feeds—and the number is double that.

Here's what News Corp. CEO Rupert Murdoch had to say on the subject of Internet news in an address to editors last spring in Washington, D.C.: "Unless we awaken to these changes, we will, as an industry, be relegated to the status of also-rans. We need to realize that the next generation of people accessing news and information have a different set of expectations about the kind of news they will get, including when and how they will get it, where they will get it from, and who they will get it from."

Convincing old media that they will gain rather than lose from doing business with Yahoo is a big reason Semel hired Lloyd Braun nine months ago; Semel is hoping that just as Millard's roots in magazine publishing make her a soothing presence on Madison Avenue, Braun's roots in Hollywood will reassure old media.

The 46-year-old Braun certainly has the charisma to bring anxious media execs to the table. In his capacious Santa Monica, Calif., office, whose terrace is the size of many New York City apartments, he ranges around like a pent-up teenager. Dressed with the studied schlumpiness—untucked shirt, spotless shoes—that is the uniform of Hollywood creative executives, he fiddles with a golf ball and putter, a chair, and a Magic Marker; he plays Michael Jackson's "Bad" from his Yahoo music collection. "Right after the trial I downloaded it and started blasting it, and everyone has been loving it," he screams over the King of Pop's familiar sound blaring from the speakers.

Braun is charged with keeping Yahoo's hundreds of millions of users coming back day after day. Don't mistake his enthusiasm for flightiness: He is one of Hollywood's toughest, most connected operators. A former entertainment lawyer and talent agent, he has created hit TV shows for more than a decade. At Brillstein Grey Entertainment he helped develop The Sopranos, and at ABC he was one of the brains behind Desperate Housewives, Lost, and Grey's Anatomy.

Though he has been at Yahoo less than a year, Braun has already shaken things up—to the consternation of some of Yahoo's old guard. Before he came, Yahoo's various sites, like finance, news, and entertainment, were semiautonomous units largely run as fiefdoms by powerful general managers. That caused problems. The sites didn't cooperate well, so lots of work was duplicated, and Yahoo had difficulty dealing coherently with content suppliers. Semel says, "Even though sports, news, and entertainment were licensing things and doing partnerships with the same companies, we did it through five different voices and five different people."

Braun is fusing the fiefdoms into a single unit in the Colorado Center in Santa Monica and requiring everyone to relocate. Yahoo Finance, which is based in New York City, is moving; so are Yahoo News and Yahoo Sports, both currently in Sunnyvale, Calif. Braun has also imposed a new layer of centralized management. He hired Scott Moore from Microsoft's MSN to oversee news and finance, David Katz from CBS to run sports and entertainment, Shawn Hardin from AOL to run games, and Ira Kurgan from Fox to focus entirely on making deals for more content. They'll join Dave Goldberg, who has been running music at Yahoo since it acquired Launch, the music company he co-founded, four years ago. (Three of the eight old-guard general managers have quit, and three have shifted to other jobs.)

With the new team largely in place, Braun is ready to apply principles of programming from the TV business to enrich users' Internet experience. The tricky part is doing it so that Yahoo users will still feel as though they control what they do and see instead of feeling as if they are watching, say, ABC television. In fact, before Semel approached him about coming to Yahoo, Braun probably would have said it couldn't be done. "I remember during the bubble when I was hearing about all these different deals for television shows on the web and wondering why anybody would want to watch [them] when they could watch The Simpsons on television. The TV industry has 50 years' experience doing television, and most of it isn't good enough. How is this business going to all of a sudden do this?"

The arrival of broadband has expanded the universe of what's possible online, however, like video and music, enabling Braun to rethink how Yahoo presents content. Asked to detail his strategy, Braun alternates between coy and expansive, but he is clear about his mission. Yahoo must create a venue that attracts so many viewers and creates so much buzz that no matter how disconcerted old media become over Yahoo's growing popularity, the money and attention it delivers to content suppliers will be too great to resist. "Aren't they going to want to be at the place where hopefully you're going to find all these other unique, exclusive, engaging things going on? I think they are," he says.

If only it were that easy. Reassuring traditional media companies that he's not out to eat their lunch is still a big part of Braun's job, and old media have made dozens of moves to assert themselves online. Two years ago the New York Times pulled its content off Yahoo; it wants readers to visit nytimes.com directly. Last year Reuters, after 154 years as a wholesaler of news to newspapers, television, and radio, set up its own news site and put customers, including Yahoo, on notice that it will soon charge more for its content. More recently, in March, newspaper companies Tribune, Knight Ridder, and Gannett bought 75% of Topix, an online rival of Yahoo News. "There's no question that a lot of the other media companies out there are nervous about [us and wondering], Okay, are they friend or foe?" says Braun. The problem isn't that they hate Yahoo, he adds; it's that "everybody now is feeling this out. There are a lot that we're talking to about working together. They far outnumber the ones that are saying, 'We want to go it alone.'"

Braun is willing to resort to old-fashioned incentives to keep his suppliers onboard—like sharing ad revenues, paying a license fee, or cutting them in on one of the premium services that Yahoo users pay for, like Yahoo Music. "Or there could simply be some promotional value that they're getting, which, by the way, is a great value," he says. "If we're sending a zillion eyeballs, 18- to 34-year-old eyeballs, let's say, to an older-skewing network, I know how valuable that would have been to me" when I was at ABC.

Watching Terry Semel surf the broadband wave should be quite a show. He has rescued Yahoo, true, but nowhere is success more likely to draw a crowd than online. Microsoft, AOL, and even Google are adjusting their business strategies to better compete. AOL last month said it's moving away from its subscription-based model and making more of its content available for free. It wants to recapture users who defected to portals like Yahoo—and the ad revenues that followed them. MSN is building its own search-advertising business in hope of someday not needing to outsource it to Yahoo as it does now. It is also working hard to cut ad clutter on its pages and broaden its brand-advertising offering, which is increasingly competitive with Yahoo's. Google, having built a mammoth franchise on the principle that old-fashioned cost-per-1,000 advertising—banner ads—has no place online, is now letting advertisers pay for ads that way. Why? Google insiders believe that as the $150-billion-a-year brand-advertising business moves online, it would be stupid not to compete.

Yahoo's rivals could also leapfrog it by innovating more fiercely. Though it spends as heavily on product development and R&D as Google and Microsoft (between 11% and 14% of revenues), both competitors define themselves as technology companies foremost, while Yahoo does not. Yet for Yahoo, falling behind in this arms race would spell big trouble.

Perhaps the biggest risk Yahoo faces is living up to the high expectations set by investors. They're not as stratospheric as those for Google, but by awarding Yahoo a $50 billion market cap and a future P/E of about 50, investors have priced in 30% revenue growth—that's doable given all the new money heading Yahoo's way, but it doesn't leave much room for error. For example, although Yahoo reported second-quarter growth of 39% in the U.S. and 59% abroad, its earnings were a hair below expectations and its stock immediately fell 10%.

Negotiating in intensely competitive environments, though, is Semel's greatest skill. In Hollywood he was known as the man who could make even the most intractable deal work. In Silicon Valley he looked like an odd duck. Just a few years shy of collecting Social Security, he barely knew how to use a computer when he arrived at Yahoo four years ago. But so what? Yahoo may have started out as a high-tech company, but it's a media company now.

It turns out that the riddle of how to succeed online isn't so tough after all. Semel is taking everything he learned in his analog past and marrying it to what he can see in the digital future. After all, he was in Hollywood when studios worried that VCRs would ruin their business and again when DVDs arrived on the scene. In each case, the studios' revenues grew, because, says Semel, new distribution options "help them reach a much larger audience—and make more money." He's betting that can happen again, but (remember the quote we said required caffeine?) this time on a scale as immense as the Internet itself.

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