June, 2005

Four years ago Yahoo was in bad shape. Terry Semel took over and turned the losses into vast profits. Kate Bulkley looks at the lessons for television

Terry Semel came from a hugely successful career in the movie business. His new-media credentials were few. His secretary at Warner Bros used to print out his emails, which Semel would annotate and return for her to type replies. At 58, he was twice as old as the average Yahoo employee. To many of the tech elite, the luddite from Hollywood seemed an odd choice to lead one of Silicon Valley’s signature start-ups.

But four years later, those doubting Thomases who poo-pooed Semel’s background and his expansionist forecast for one of the internet’s most famous brands should prepare their apologies.

In 2001, the year that Semel joined as chairman and CEO, Yahoo lost nearly $93m on $717m in revenues. The company – founded in 1994 by PhD candidates in electrical engineering at Stanford University, David Filo and Jerry Yang – had gone from internet darling to one of many net companies suffering from the advertising downturn that had accompanied the dotcom stockmarket crash in 2000.

After dramatic reorganisation, a clutch of smart deals, a rebound in the online ad market and a new focus on fee-based services such as its subscription music service, Yahoo is nowadays a very different company.

In 2004 Yahoo posted a profit of $840m on revenues of $3.6bn. The upward trend has continued into the first quarter of this year: Yahoo’s revenues for the first three months of 2005 were up 55% from a year ago to $1.2bn with a net profit of $205m; the latter figure was double the profit achieved a year earlier. A full 25% of Yahoo’s revenues now come from operations outside the US.

“This is a very exciting time for Yahoo,” Semel told investors in an April conference call announcing the first-quarter results. “Underscoring our belief that the internet will be a driving force in the revolution from mass media to “my media,” we are providing services around the world where users can find, create, share and transact with the information, content, and people they want.“

Broadband widens the revenue stream

Semel believes that advertisers will increasingly want rich-media advertising, such as video, as part of their online ads. He also believes there is still much growth potential in so-called paid search, where advertisers pay the portal to move that company’s listing to the top of the “results” from an online search.

The business is growing and under Semel’s leadership it has changed. In 2001 Yahoo had only about 70,000 registered users and the focus was on attracting advertising dollars.

Today advertising is still the lion’s share of Yahoo’s revenue, but with the number of people connected to broadband rising at a rapid pace, there are opportunities to move beyond Yahoo’s origins as a search engine for web content.

According to a 2004 study by Milward Brown, among internet users a full 20% of the time they spend consuming media is now spent online. This is almost entirely at the expense of other media, including radio, magazines, newspapers and, most significantly, TV.

Yahoo counts some 372 million users (those who come to the site at least once a month). This is up around 100 million from a year ago. But perhaps more significant in the increasingly competitive online advertising world is that globally 176 million people are registered users of Yahoo; in other words they have signed up for a Yahoo email address and are considered regular users. Around 8.9 million of these are paying for Yahoo premium services (such as mail-forwarding and online dating), up from 5.8 million a year ago.

Semel thinks the next growth phase for Yahoo will be driven by consumers using more services for longer periods of time. This will be achieved by offering Yahoo users more media-rich content and services.

The latest move by all three of the big search portals (Yahoo, MSN and Google) is video search, where users can call up not only the usual text and still images, but also video clips. Video search provides a glimpse of how people may eventually find and view TV programmes.

In a 500-channel universe where people are bombarded with choice, navigation tools like video search will become increasingly important.

Yahoo is marking its 10th anniversary this year by opening up a media headquarters in the old Metro-Goldwyn-Mayer building in Santa Monica, next door to all the Hollywood movie studios and major US television networks.

Semel has been adding Hollywood clout to Yahoo, hiring former ABC executive Lloyd Braun and penning deals for exclusive content. An example of the latter is its recent successful partnership with NBC and reality TV guru Mark Burnett on the US version of The Apprentice that starred Donald Trump.

The Apprentice collaboration worked very well indeed, particularly for advertisers and sponsors. By encouraging viewers of the TV programme to go to Yahoo to find out more about a Pontiac car featured on one particular episode, the carmaker (which was a show sponsor) generated 1,000 pre-orders for its new car model within 41 minutes of the episode ending.

If Semel was not the obvious choice to lead Yahoo in the beginning, you could sees why. Now 62, he joined Warner Bros straight out of college. He worked for short times at Disney and ABC, but he spent 24 years at Warner Bros.

Most notably he was chairman and co-CEO with Bob Daly when they expanded the studio’s revenues from $750m to $11bn by adding businesses like home video (he pushed Warner’s move into DVDs against heavy industry resistance), TV, and consumer products. On his watch Warner produced movie hits Batman and Chariots of Fire, and in TV, ER and Friends.

Overture leads to money-spinning hits

Semel’s early days in Hollywood had been in theatrical sales, securing screens for movies to be shown in the then highly fragmented US cinema business.

“Terry came from the sales end of the movie business and rose to the top which was highly unusual in Hollywood,” says David Puttnam, who has known Terry since the 1970s and counts him as a personal friend. “He understood the exhibition business and the value of research and he was very good at relationships with filmmakers. I think he was so successful in Hollywood because he never went Hollywood.”

When Semel left Time Warner at the end of 1999 (with stock and options believed to be around $250m), he was not necessarily looking to get back into Hollywood.

On his arrival at Yahoo in 2001 he cut the number of business units from 44 to four and brought in some “old media” executives to run businesses such as advertising sales and marketing.

But a pivotal deal was the purchase of paid-search listings company Overture for $1.6bn in the summer of 2003. Overture ended Yahoo’s reliance on outsourcing its search technology from rival Google. This increasingly difficult situation arose – before Semel arrived – when the company had decided to move away from its original search business to focus on creating a portal of content aggregated from the web.

Understanding the significance of such a deal is why Semel and Yahoo are a good fit. Unassuming and methodical, an Anglophile (he’s married to an Englishwoman), Semel has certainly proved his new media credentials.

Asked why Semel may have turned down an interview for the top job as head of Disney recently, Puttnam speculates: “Terry’s enormously energised by the youth that’s around him at Yahoo and I think the idea of having an argument over the size of some movie star’s trailer is not very attractive.”

He may not want to go back to Hollywood but he is certainly bringing his track record and grasp of what works with audiences into the online world.