New Starting Points

Under pressure from disgruntled investors, Yahoo this summer replaced CEO Terry Semel with Yahoo cofounder Jerry Yang and promoted Susan Decker to president (see "Player Roster," page 33, and "Can Yang Turn Things Around?" page 42). Damage control and promises to improve were the first order of business for those now in the hot seat.

In July, during the first earnings call under their leadership, Yang and Decker spent much of the time reassuring investors that they understand the extent of the company's challenges and wouldn't repeat mistakes. Decker specifically acknowledged as a strategic error the failure to quickly integrate Overture, the company Yahoo acquired in 2003 to bolster its keyword advertising business.

And indeed, Bradley Horowitz, vice president of product strategy, known for promoting key acquisitions such as Flickr, says Yahoo is already making significant changes, particularly by opening its platform and encouraging Web developers to "hack Yahoo." He also acknowledges the reality in criticisms that the company has been bureaucratic, unfocused and slow to adjust to changes in the Internet business.

"We've owned up to a lot of these complaints at a high level and recognized that a lot of change is necessary," Horowitz says. "We were late to the game in search, we were late in social networking, and we don't want to be late any more. We have a huge opportunity and a lot of unique assets.

"It's easy to forget in the kind of hailstorm of criticism that's been levied against this company," he adds, "that we still have a fantastic business that's healthy and vibrant and growing."

To his point, Yahoo took a slight lead over Google in the August American Customer Satisfaction Index e-business report produced by the University of Michigan. Perhaps more significant, Yahoo's score climbed while Google's fell at about the same rate: Yahoo was up four percent to 79 points out of 100 while Google was down (for the second consecutive year) 3.7 percent to 78 points.

"They're within the margin of error, which is two points, but the more important thing is that Yahoo has closed the gap," says Larry Freed, CEO of Forsee Results, which sponsors the study. Customer satisfaction is a leading indicator of business success, Freed says, so the study shows that Yahoo could be poised for a turnaround.

Most of Yahoo's customers are advertisers aiming to reach Internet users, not the users themselves, of course, so such a turnaround would have less direct impact on Yahoo than it would have on most other companies. Still, satisfied users are more likely to return to the site, providing the audience advertisers want.

Some risks Yahoo has taken in redesigning its home page and other parts of its site are paying off now that consumers have had a chance to adjust, Freed adds. Meanwhile, the simplicity of Google's search-centric home page may be losing some of its charm for users who don't find what they're looking for on the first page of search results. Because of marketers' search optimization techniques and spam, Freed says, "search is no better than it was a few years ago and may even be worse."

Reporting back to analysts in October, Yang said Yahoo would tweak its strategy by focusing on the strength of its "starting points" such as Yahoo Mail, My Yahoo and the Yahoo home page, which many people make their first stop on the Web. Dodging the question of whether Yahoo needs to buy a social networking site such as Facebook, Yang pointed to the variety of Yahoo sites that already have a "social aspect."

"What we must do better is integrate these assets and execute with a clear focus," he said. Meanwhile, Yahoo will seek to be the "must buy" for Web advertisers and open its platform to developers it has "unintentionally" excluded.