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Last Updated: Tuesday, 19 June 2007, 00:15 GMT 01:15 UK
Can Yahoo revive its digital dreams?
By Tim Weber
Business editor, BBC News website

Yahoo chief executive Terry Semel has been sidelined, and search engine co-founder Jerry Yang is taking the reins - but can he revitalise the struggling company?

Jerry Yang, Yahoo's new chief executive
Jerry Yang was a student when he co-founded Yahoo

Let's make no bones about it: Yahoo is an internet giant.

The company has an annual turnover of $3.2bn, 12,000 employees and more than 500 million unique users.

Not bad for a venture that started as a small web site run by a couple of undergraduate students at Stanford University, listing cool internet links.

And yet, and yet.

Compared to market leader Google, Yahoo is nearly an also-ran. The two companies may be roughly equivalent in terms of staff and audience numbers - but Google's sales are 50% higher, and its profits four times that of its older rival.

And that's the reason why all is not well in Sunnyvale, California, at the headquarters of Yahoo.

The professionals

When Jerry Yang and fellow student David Filo founded Yahoo 13 years ago, they made all the right moves.

They understood the internet and had all the bright ideas, but got professional managers in to run the operation. That helped Yahoo to both attract investors and grow at a stunning pace.

When the first internet bubble burst they made what seemed to be the next clever move - hiring Terry Semel, the co-chief executive of old-media giant Warner.

The man understood content, Hollywood, audiences - and was supposed to take Yahoo to the next level.

The hitch

Mr Semel quickly proceeded to turn Yahoo into a media and content company fit for the internet age.

On paper (or the computer screen) it seemed to be a great strategy.

There was just one hitch: Yahoo's problem was not the lack of content.

Terry Semel
Terry Semel tried to turn Yahoo into a media company

Rather, it was the fact that Yahoo failed to focus on its core business: helping web users to find information.

While Mr Semel accumulated content, Yahoo's website got ever more cluttered and difficult to navigate, and the quality of its search engine fell well behind that of archrival Google.

This is the main reason for Yahoo's underperformance: Google's search results made Yahoo's endless lists of sorted results somewhat irrelevant.

When Yahoo realised that it had to improve both its design and search, it was too late. Buying several smaller search engines - from Altavista to Inktomi - did little to improve results.

Google, meanwhile, continued to build on its lead by drawing users ever closer into its universe, offering a multitude of tools - from e-mail to online word processors - that were always a cut above Yahoo's offerings.

Google had realised that it didn't need to create its own output. It does not have to compete with the best the web has to offer as long as its software developers are able to write the algorithms that allow readers to find the content that is highly relevant to their needs.

No wonder people say that they have "googled" something. They don't ask "Did you yahoo today?".

Yahoo's broken business model

Most importantly though, Yahoo failed to match the success of Google's biggest money spinner - paid search advertising.

Next to every Google (or Yahoo or MSN) search, users also get a few sponsored links. Every click on such a link is money in the bank for the search company.

Google's strategy was counter-intuitive - but ultimately successful. It deliberately limited the number of links on offer.

What might have looked to some like turning down good business has actually ended up driving more click-throughs - and thus more money.

In contrast, Yahoo failed to turn its higher number of users and page impressions into equally healthy profits.

And given the fact that Yahoo deems itself to be a web portal, it inexplicably failed to get into social networking.

Less than a year ago, Yahoo identified the problem, and devised a strategy to fight back.

Code-named "Panama", a new paid link strategy was supposed to trigger the turnaround. But it was much delayed, and initially produced mediocre results.

Yahoo says that Panama now beats expectations. That may explain why head of advertising Susan Decker has been promoted to company president.

Going one better

But 13 years after Yahoo was launched, has Jerry Yang learned enough to run the company?

More importantly, has the 38-year-old got the vision and strategy that can give the online media firm the focus it needs to score with its users?

For him, this is probably not about spending money. With $2.2bn in the bank, he is deemed to be the world's 432nd richest person.

It's rather that in Silicon Valley money is a measure of success. And the two Google founders, Sergey Brin and Larry Page, are much much richer - simply by building a better business.

Yahoo will have to make itself more relevant to its users again - by helping them to navigate the internet intuitively.

And - with banner advertising suffering sharp declines - it has to finally crack paid search advertising.

Jerry Yang will be itching to prove that he can go one better than his fellow Stanford alumni.

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