Foundering Yahoo! Reaches out to Co-founder

Bringing a founder back into the fold seems to have done well for Apple and is at least being given a chance to work at Dell. Now Yahoo! has joined the ranks of those companies looking to a once and future leader for guidance through tough times.

Less than a week after a Yahoo! shareholder meeting blamed CEO Terry Semel for failing to keep the perennial second-ranked Web portal/ search engine abreast of Google, Semel has stepped aside and will let Yahoo! cofounder Jerry Yang take over the company’s leadership.

After six years spent running Yahoo!, Semel announced late Monday that he will move to a newly created post, “non-executive chairman”, while Yang will relinquish his old one (“chief Yahoo!”) to become CEO of the company. Susan Decker, former head of Yahoo!’s publisher and advertising group, will become president.

The changeover had been rumored periodically during the last year of Semel’s tenure, but those rumors grew last week when he and other company officers won re-election with only 66% of the vote. That compared to a 99% vote at last year’s meeting, when Yahoo! seemed poised to grow search market share with the coming rollout of its Panama search platform.

Participating in a conference call after the announcement with both Yang and Decker, Semel said he had been discussing giving up his leadership role at Yahoo! “for quite some time.”

“I’ve long been talking to the board about the importance of insuring a smooth succession in Yahoo! senior leadership, and more recently about the need for a leadership team committed to carrying Yahoo! through its multi-year transformation,” he said.

“The past year has been a difficult one for Yahoo!, and I know that none of us has been satisfied with the company’s recent financial performance,” Semel said. And while the company had laid the foundation for future success with several of its initiatives—most notably the Panama launch, which has made Yahoo! more controllable and more attractive to advertisers—the time for a management switch was “sooner rather than later”, Semel says he told the company’s board.

“This is the right thing to do for Yahoo!, and the right time to do it,” he said.

In the same conference, Yang paid tribute to the financial milestones accomplished during Semel’s tenure since 2001: bringing the company’s revenue from $717 million in 2001 to $6.4 billion last year, boosting its user audience from 170 million to 500 million and creating more than $30 billion in shareholder value. But he also said the company needs to “execute with speed, clarity and discipline” in order to “focus better on what’s important to our users, customers and employees” and attract and retain technical talent.

Decker said the Semel-driven reorganization of Yahoo! into three divisions centered on users, advertisers and publishers, will be revised to integrate the audience and advertiser groups under her direction.

She said that while the Panama launch is on track to produce double-digit increases in revenue per search by the end of the year, slowing growth in display advertising and lower than expected revenue from affiliate search will keep Yahoo!’s second-quarter earnings in the low-to-midpoint range of previous guidance.

Semel’s position at Yahoo!, to which he moved from a post as chairman and co-CEO at Warner Brothers, was thrown into question late last year with the leak of an internal memo known as the “peanut butter manifesto”, suggesting that Yahoo! was spreading itself too thin and failing to compete effectively with Google on any front.

While Yahoo! under Semel did a good job of planting a stake in selected online specializations such as social networks and display ads, the company has failed to leverage those early leads and in fact has been outshone in the past year by rivals making some very strategic acquisitions. Last August the company lost a few steps in its race to head up social networking when Rupert Murdoch’s News Corp. bought MySpace, Google acquired YouTube and Microsoft struck an ad deal with Facebook.

Now Google and Microsoft both have multi-billion-dollar buyouts of large display ad platforms/ networks pending before the Federal Trade Commission; Yahoo!’s response was to acquire outstanding shares in an ad exchange, which brings with it none of the user data or ad relationships of the other acquisitions.

Yahoo! has also struggled to remain visibly competitive with super-heated Google—a job that will only get harder as online advertising consolidates. Despite past assertions that it was closing the gap with the search market leader and with general acknowledgement that introducing quality rankings to Panama search ads was an important step, Yahoo still is perceived as underperforming against Google. According to Internet traffic metrics firm Hitwise, Google increased its U.S. search share from 59.3% in May 2006 to 65% last month, while Yahoo’s usage dropped slightly to 20.9% from 22% last year. (MSN Search and Ask.com usage also dipped.)

The big picture is more daunting still. Google earned more revenue last quarter than Yahoo! posted all year and has increased its stock price six fold since going public in August 2004. Yahoo!’s stock price, although triple what it was when Semel took over in May 2001, has dropped to a level a bit lower than before Google’s initial public offering.

Reaction to Yahoo!’s change at the top was initially enthusiastic, but has modulated in the last few days into questions about Yang’s leadership and effectiveness and about whether he and Decker are a permanent team or simply placeholders.

Meanwhile rumors have started up again about possible deals Yahoo! might make—or deals that might be made for it. The notion of a Microsoft/ Yahoo! alliance, dormant since Microsoft’s $6 billion bid for aQuantive was announced a few weeks ago, is alive again. So is the prospect that Yahoo! may buy social community site Facebook.

And The Times of London reported yesterday that Rupert Murdoch, whose News Corp. aced all the top search engines out of ownership of MySpace last year, is in talks to swap those shares for a 25% stake in Yahoo!