Inside Yahoo`s Identity Crisis

 
 
By David F. Carr  |  Posted 2007-10-26
 
 
 

The exclamation point at the end of its logo once symbolized Yahoo's synonymity with the exciting opportunities of the Internet. Originally dubbed "Jerry's Guide to the World Wide Web," Yahoo defined itself as the portal to the digital world. Missteps and missed opportunities caused it to lose out on some key opportunities—including an acquisition of rival Google—which is now costing it Web traffic and advertising revenue and raising questions about its viability. Under pressure, Yahoo is trying to reinvent itself as a true multimedia company, investing millions of dollars in new technology and products that could restore its former glory.

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Also in This Feature:

  • Yahoo Timeline
    A look at Yahoo's development from its founding in 1994 to present

  • Return of the CEO
    Just as Michael Dell and Steve Jobs reclaimed their CEO mantles, can Jerry Yang lead Yahoo back to glory?

Google: The Change Agent

What is it that's transforming the trademark exclamation point in the Yahoo! logo into a question mark? In a word, Google.

Sure, Yahoo survived the dot-com bust and evaporation of easy money in Internet advertising. But that's history. Now the company is forced to compete with the powerhouse that invented a search engine advertising money machine right under its nose and is dwarfing it financially. Yahoo's profits dropped almost six percent to $454 million during the first nine months of 2007, while Google's profits rose 46 percent to $3 billion.

Worse, Yahoo has lost its longtime position as the Internet's most trafficked Web site. Although Yahoo's family of Web sites still attracts slightly more unique visitors than Google's in the U.S., according to ComScore Media Metrix, it trails internationally with 478.7 million unique visitors compared with 561 million for Google as of August. Microsoft also ranks high on the list, though it's not yet a major threat in Internet advertising. And younger Internet users are increasingly choosing social networking sites like Facebook or MySpace as alternative portals.

Not All Gloom and Doom

There are bright spots, assuming Yahoo can cash in on them sooner rather than later.

In search:
Yahoo retains the No. 2 position in the search market, albeit largely as a byproduct of its audience for news, mail and other Web site features. An upgrade to its search marketing system that started rolling out late last year is paying off: Yahoo says search revenue for its Web sites rose 30 percent from Q3 levels a year ago, contributing to an overall 12 percent increase in revenue. Also, an October search engine upgrade is getting good early reviews from analysts for its inclusion of Yahoo Search Assist, which suggests keywords to users hesitating over what to enter in the search box. Yahoo has also integrated image and media search results. Yahoo Answers, a social search site where users can submit and answer each other's questions, is also proving to be one of Yahoo's fastest-growing properties.

Beyond search:
Most Google properties going head to head with Yahoo properties (think Google Finance vs. Yahoo Finance and the like) haven't made much of a dent.

Even Gmail had less than a third the audience of Yahoo Mail as of August, with 82 million unique visitors worldwide vs. 255 million, according to ComScore. However, Gmail's audience grew 64 percent year over year while Yahoo Mail's audience dropped one percent.

Off-site ads:
Yahoo's summer purchases of online ad exchange Right Media for almost $700 million and behavioral marketing network Blue Lithium for $300 million expand the company's ability to place ads on other publishers' Web sites. This is another strong market for Google, but a more fragmented one in which Yahoo has a better chance of making inroads.

On-site ads:
With its new SmartAds product, Yahoo aims to create a new category of display advertising based on behavioral targeting techniques that mimic the specificity of search advertising. For example, SmartAds can match a Los Angeles user researching a trip to Las Vegas with an airline offering cheap flights between the two cities. Better yet, the relevant ads may appear throughout the site, not just on the search results page, letting Yahoo and its customers capitalize on the breadth of its content.

Additions and Upgrades:
Yahoo continues to invest in new specialty sites, such as its new Yahoo Mash social networking site, and revitalization of existing sites (Yahoo Mail, with its more interactive Web 2.0-style user interface, and Yahoo Real Estate, which is gaining market share by mashing up data and applications from other Yahoo and partner sites). The company is also embracing open source technology, and inviting developers to work on its platform. (For more, see "Accentuate the Positive," page 31.)

"They've lost the battle of the search box," says Whit Andrews, a search technology analyst at Gartner. "Their effort now is to find a new battle."

Yahoo's greatest potential, Andrews says, is in tying together its wide assortment of Web properties, particularly those with a social component.

Yahoo 360, a site aimed at connecting people a la Facebook and MySpace, never gained a large following, and now the company is trying again with Mash. But Yahoo Groups, Yahoo Instant Messenger, bookmark-sharing site Del.icio.us, photo-sharing site Flickr and other properties are solid building blocks, he says. And he sees Yahoo combining those assets more intelligently—by letting Yahoo Instant Messenger users see what songs their friends are listening to on Yahoo Music, for example.

"They still have assets any other company in the world would die to have," says Jeremy Ring, a former Yahoo sales executive who's now a Florida state senator and venture investor. "Yahoo may be a broken brand on Wall Street but it's not a broken brand in the rest of the world."

Even on Wall Street, where its stock has hovered in the mid-$20s much of the year (Google's recently topped $600), Yahoo has friends. Bear Stearns analyst Robert S. Peck named Yahoo a "top pick" in September, saying the pendulum in investor sentiment between greed and fear has swung too far toward fear.

Yahoo is taking steps to get beyond its "sunk costs" in past mistakes and invest in new initiatives with greater potential, he said.

Peck also rejected the argument advanced by several other Wall Street analysts that Yahoo could make more money by outsourcing search advertising to Google rather than continuing to compete in that market. While that might pay off short term, he said, Yahoo will be better positioned to offer advertisers a complete package if search remains part of the mix.

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.

On the Drawing Board

Yahoo chief data officer Dr. Usama Fayyad believes Google's advantage in keyword search will last only until Internet users find something better. "I refuse to believe that the way we will interact with the world's knowledge is to type 2.8 keywords into a search box and look at the top 10 results out of 600,000, on average," he said in a speech to the Association for Computing Machinery's Knowledge and Data Discovery special interest group, which presented him with its Innovation Award in August.

In that talk and in an interview with Baseline, Fayyad outlined how the Yahoo Research organization he oversees is tackling the scientific and economic challenges he hopes will lead to the next search breakthrough. Yahoo has invested in improving its own search technology to the point where, in blind tests, consumers judge Yahoo's search results to be just as good as Google's, Fayyad says. Still, being just as good isn't enough when it comes to building search market share, he concedes.

"There is a brand advantage, where Google is definitely benefiting from being earlier to market, at least with the technology of today," he says. "I would agree that if we don't offer something that's substantially better, there is little reason to switch."

While searching for a substantially better way to search, Yahoo Research is also looking for ways to capitalize on the company's related expertise. "Search is an example of an interactive application," Fayyad says, and it's intriguing to marketers because it gives a glimpse into what users are interested in at a given moment. But it's not the only such application.

When users at Yahoo Travel search for a flight between two cities, for example, they provide a host of clues about their preferences. So, in principle, a properly targeted ad presented at the end of a travel search could command a premium. "The market hasn't figured this out yet," he says, so Yahoo has to work on making the advantages more obvious.

Yahoo's research also suggests it should be able to deliver better results by having a longer memory for user behavior. "Just by looking at data from Yahoo Autos, we can identify 300,000 consumers per month whom we know, with 75 percent confidence, will buy a car within 90 days," Fayyad says.

If you're an automaker, every ad you show to one of those people within those 90 days is a chance to sway that person in your favor, he says.

Some numbers he cites regarding the effectiveness of these tactics, Fayyad cautions, are based on tests, not on operational results. Still, he talks about driving up conversion rates by 900 percent when users are shown a behaviorally targeted ad rather than a generic display ad. Further, a study Yahoo conducted with Harris Direct also suggests that display advertising in conjunction with search advertising is more effective than search advertising alone. Yahoo found that members who'd seen a brand ad for financial services firm Harris Direct were 60 percent more likely to search related to the ad's market category, 140 percent more likely to click through to its Web site from the search results, and 250 percent more likely to click on a "sponsored link" search ad for the company. The bottom line was a 91 percent better return on investment based on the business generated for the online brokerage.

"With search today, you get one shot and it's over," Fayyad says. "Well, if you're in a place like Yahoo, it's not over." SmartAds, the behaviorally targeted display ad format Yahoo announced in July, exemplifies this approach. By creating what it calls a "creative assembly platform," Yahoo lets advertisers design ads around interchangeable content modules—graphics, text blocks and real-time data feeds— so they can be delivered in thousands of variations. Initially, this capability is being targeted at the travel, auto and retail markets. In travel, for instance, it means the ability to display current deals for flights between two cities not just during flight search and not just on Yahoo Travel but for days afterward, anywhere on yahoo.com.

"It's actually very interesting," says Martin Laetsch senior director of search strategy at SEMDirector, a marketing automation firm that helps advertisers design campaigns and place ads. Creating these customizable display ads may be too complicated for some advertisers, particularly the smaller ones who like the simplicity of the textbased ads typically used for search marketing, he says. "But the more sophisticated advertisers will have an appetite for it if the ROI is there—and the people in the pilot programs say it's there."



Another important step Yahoo took recently—one Laetsch believes was long overdue—was to integrate the search and display ad sales teams. "It's been very difficult to purchase with them if you wanted to do an integrated media plan for both display and search," Laetsch says.

Yahoo must move quickly if it wants to capitalize on the synergy between display and search advertising, Laetsch adds, given Google's pending purchase of display advertising giant DoubleClick. (The $3.1 billion deal was announced in April, but as this issue went to press it was still being held up by U.S., European Union and Australian regulators.)

Yahoo also needs to hold onto its audience, which by ComScore's count dipped to 479 million unique visitors in August, compared with 482 million a year earlier.

What's more, time spent on some Yahoo sites is sliding. In September, JPM Securities analyst William S. Morrison warned that, according to ComScore's "minutes invested per user" metric, Yahoo Games had suffered a 47 percent drop, Yahoo Sports had lost 11 percent, Yahoo Mail nine percent and Yahoo News six percent. There were some big gains, too—time spent on Yahoo Answers rose 322 percent, Flickr was up 198 percent and Yahoo Messenger increased 36 percent—but while these are all important parts of Yahoo's social networking strategy, they're not as important to Yahoo's ad revenues as the areas on a downslide.

And, ultimately, even if Yahoo can get its audience numbers up, what matters most to its income statement is how well the company can convert that traffic into ad dollars.

If the answer continues to revolve around keyword search, that's bad news for Yahoo, which got just more than 23 percent of the total U.S. search traffic measured by ComScore's survey in August, compared with 56.5 percent for Google. "What we've been seeing is a slow but steady share increase for Google at the expense of everybody else in the industry including Yahoo," says ComScore analyst James Lamberti.

Google has established itself as the premier brand for keyword search, while people go to Yahoo for other reasons and sometimes use its search engine while they're at it, Lamberti says. Yahoo is seen as "an older brand, easy to use" but not necessarily appealing to younger consumers.

Yahoo still has a chance to redefine what it means to be an Internet media company, but first it has to learn to get out of its own way, according to John Zapolski, who quit as a director in Yahoo's user experience group in 2004 to found the Management Innovation Group consultancy. "In general, I think Yahoo's still caught between different business models and conceptions of what it should be as a business," says Zapolski. "And it's unclear to people inside the company what Yahoo should be." Yahoo has "not all that consciously" put itself in a position to become "a hybrid between a social media company and an old-world media play," but it also must follow a "shrink-to-grow" strategy that would mean cutting headcount and eliminating duplication.

If it can do all that, Yahoo has a chance to raise its value to advertisers through products like SmartAds that take advantage of the company's intelligence about its members. "There's definitely potential," Zapolski says, "but the window is closing more quickly every day now that it's up against Facebook and others who are also building strong user profiles."

Front-Loading Web Performance

In seven years at Yahoo, Steve Souders had focused most of his efforts on back-end engineering tasks—squeezing more performance out of a database and optimizing memory usage in C++ programs running on a server, for instance. So three years ago, when he was named chief performance yahoo and charged with improving the user experience for visitors to Yahoo Web sites, he expected it would mean doing more of the same.

But it has not worked out that way. In the course of investigating the elements of user experience, Souders found that the biggest impact came from the communications between the Web site and the user's browser. His findings form the core of the lessons he imparts in a new book, High Performance Web Sites (O'Reilly, September 2007).

Souders changed his mind after measuring each step in the process of downloading a home page, with the data charted over time. From the start of a new visitor's request for a page, he found, only five percent of the time is spent downloading the HTML (the HyperText Markup Language) document containing the text of the page. The other 95 percent of the time is spent downloading and parsing images, stylesheets and JavaScript.

And at a site like Yahoo, back-end engineering is primarily about how quickly the site can assemble HTML documents—personalizing pages, retrieving information from databases, merging news feeds and feeding the results into a Web page template. This brought Souders to the sobering conclusion that he'd spent most of his career at Yahoo worrying about five percent of the performance problem. "It turns out that 80 percent to 90 percent of end user response time is spent on the front end," he says. "So the greatest potential for improvement is on the front end."

With this understanding, he and a small team of engineers set to work figuring out how to improve the speed at which Yahoo delivers pages.

There's nothing new in recognizing the importance of response time to Web development—it's long been known that users forced to wait more than a few seconds are likely to become frustrated and depart for some other, faster site. The conventional advice includes limiting the number and file size of images on a page to make it load more quickly.

But Souders' performance team found some more subtle strategies, which they have codified into 14 rules (see box, next page). Most of the rules revolve around making sure the browser doesn't have to work too hard to load and display Web pages, particularly by making maximum use of the browser cache. That's where your browser gets rid of bits and pieces of Web pages you've viewed.

For example, if a visitor has been spending time at yahoo.com, the cache on his or her machine will contain a copy of the Yahoo logo. If the visitor leaves the Web site and comes back, the browser can display the cached copy of the logo very quickly, avoiding the need to retrieve a new copy from the Web server.

The No. 1 rule on Yahoo's list is to minimize HTTP requests. Every time a browser needs to request anotherimage or another JavaScript file to be included in the page, it must send a message to the server using the Web's Hypertext Transfer Protocol (HTTP) and wait for a response. Every request takes time and runs some risk that the connection will be interrupted and the download will have to start over.

So it would be simpler in some ways if every Web page were delivered as one big file rather than dozens of smaller files. On the other hand, if you can identify the files included in a Web page that only change infrequently and get the browser to cache them, you can cut down on the total amount of data transmitted.

For that reason, Yahoo advises you break out Cascading Style Sheets (CSS) and JavaScript code into separate files rather than embedding them into the HTML of a Web page. This way, if the same CSS or JavaScript is going to be used by multiple pages within a Web site, the browser can download it once and cache it.

However, Yahoo breaks this rule on its own home page and the opening pages of many sections of its sites because pulling in all the needed HTML, CSS and JavaScript code with one HTTP transaction still tends to make a better first impression.

Controlling Cache Another trick is to configure your Web server to transmit image, CSS and JavaScript files with an expiration header set far into the future. This tells the browser to retain the cached files indefinintely instead of just for a few hours or days. You're effectively telling the browser these files will never change and it doesn't have to keep checking for fresh versions.

Eventually, you'll probably change your logo, CSS font stylings and JavaScript. But because the browser identifies these components by Web address, you can force it to load a new version by simply changing the filename or directory.

By applying a few of these simple rules, Souders' team was able to make a big impact on a key section of the Yahoo site—its search results page. "Within a year, we were able to improve response time by 40 to 50 percent," Souders says.

(To grade your Web site against Yahoo's rules, download YSlow, a Yahoo-developed open source add-on to Firebug, another Firefox browser extension. Together, YSlow and Firebug provide a variety of tools for profiling and debugging Web sites and applications.) —D.F.C.

Yahoo's 14 Rules for Exceptional Performance 1 Make Fewer HTTP Requests 2 Use a Content Delivery Network 3 Add an Expires Header 4 Gzip (Compress) Components 5 Put Stylesheets at the Top 6 Put Scripts at the Bottom 7 Avoid CSS Expressions 8 Make JavaScript and CSS External 9 Reduce DNS Lookups 10 Minify JavaScript 11 Avoid Redirects 12 Remove Duplicate Scripts 13 Configure ETags 14 Make Ajax Cacheable (Details at developer.yahoo.com/performance/)

Yahoo Base Case

HEADQUARTERS:
701 First Avenue, Sunnyvale, CA 94089

PHONE:
(408) 349-3300

BUSINESS:
Internet media and technology company

CTO:
Jerry Yang stepped into this role after the departure of CTO Zod Nazem in May, before Yang was bumped up to CEO. Co-founder and Chief Yahoo David Filo plays a strong behindthe- scenes role in Yahoo's technology choices but doesn't appear to covet the CTO title.

FINANCIALS IN 2006:
$6.4 billion in revenue, with net income of $751 million

CHALLENGES:
Yahoo must find ways to sustain its audience, maintain its base of loyal, registered users, and figure out better ways to make money off those users through search marketing and other forms of advertising.

BASELINE GOALS:

  • As of October, Yahoo said it was aiming for between $5 billion in sales for 2007 (excluding "traffic acquisition," the cost of working with affiliates to drive traffic to Yahoo), compared with $4.6 billion for 2006.
  • In the same report, Yahoo said it was targeting operating income of $658 million to $678 million for 2007, compared with $941 million in 2006, as it invests in improving its business.
  • Yahoo points to the growth in advertising revenue on its "owned and operated" Web sites as a trend it aims to continue. In that segment, search advertising revenue rose 30% and display advertising rose 20% from a year ago in the third quarter, according to the company. However, Yahoo must also reverse a downward trend in advertising income from affiliate Web sites.

Accentuate the Positive

One big challenge for Yahoo: convincing members, as well as current and potential employees, that it has something fresh and exciting to offer.

A prerequisite, according to vice president of product strategy Bradley Horowitz: addressing the legitimate criticisms of how Yahoo has done business, with its reliance on overly bureaucratic processes that have restricted innovation. "There is merit to those complaints, that this is a big company and it's been hard to get the attention of the people who make the decisions," he says. "Some of that we have to own up to."

Horowitz has instituted several programs to get a more positive Yahoo vibe going. On "Hack Day" events Yahoo holds periodically at headquarters and other locations around the globe, company programmers brainstorm, prototype and demo new products and features they suggest adding to Yahoo sites. One Hack Day idea that recently made it into use on the Yahoo Shopping site is a "search by color" feature that lets shoppers see all the products in a given category—shirts, shoes, appliances—that most closely match the desired color.

A more involved product proposal can win the developer a stint at Brickhouse, an internal product incubator where employees take a few weeks' break from their regular jobs to flesh out prototypes. An early Brickhouse product that's gotten a lot of attention from tech analysts and bloggers is Yahoo Pipes, a visual Web tool for assembling and manipulating Internet data feeds and Web services. Mashups published to the Pipes site include one that sucks in Reuters news stories, Horowitz has instituted several programs to get a more positive Yahoo vibe going. On "Hack Day" events Yahoo holds periodically at headquarters and other locations around the globe, company programmers brainstorm, prototype and demo new products and features they suggest adding to Yahoo sites. One Hack Day idea that recently made it into use on the Yahoo Shopping site is a "search by color" feature that lets shoppers see all the products in a given category—shirts, shoes, appliances—that most closely match the desired color.

A more involved product proposal can win the developer a stint at Brickhouse, an internal product incubator where employees take a few weeks' break from their regular jobs to flesh out prototypes. An early Brickhouse product that's gotten a lot of attention from tech analysts and bloggers is Yahoo Pipes, a visual Web tool for assembling and manipulating Internet data feeds and Web services. Mashups published to the Pipes site include one that sucks in Reuters news stories, matches its datelines to Yahoo's geographic database, and displays its headlines overlaid on a map via Yahoo Maps.

Rather than invest in too many mammoth projects, Yahoo wants to place lots of small bets on new products and then doubledown on those that show promise, Horowitz says. This approach isn't appropriate for big infrastructure overhauls such as Panama but it's ideal for more discrete projects.

Although it wasn't a Brickhouse product, Horowitz also cites Yahoo Mash because it wasn't "a giant undertaking by Yahoo teams with dozens of people, but the passion product of a small team." Currently operating as an invitation-only beta site, Mash is Yahoo's second attempt to build a friendto- friend social network to compete with Facebook and MySpace. The first, Yahoo 360, never really took off.

"Now our job is to be good listeners," Horowitz says. If Mash "resonates with the marketplace," Yahoo will charge ahead with it, he says, but the company will retrench "if people are suffering social network fatigue and we didn't hit the bull's-eye, or if this is the wrong service at the wrong time."

Open for Business

Yahoo is also trying to stir things up by opening parts of its technology platform, encouraging others to build on them, and holding Open Hack Day events, where outsiders can showcase their own Yahoo-based inventions.

You can embed Yahoo search results or maps in your own applications through Web services application programming interfaces (APIs) documented at the Yahoo Developer Network Web site, for instance, and that access is free unless you exceed a "rate limit" threshold or require a commercial license with service-level guarantees. Yahoo currently supports more than 30 such APIs, including those for Flickr and other sites it owns.

"They're doing a lot of interesting things," says Paul Bausch, a Web developer and author of Yahoo! Hacks and co-author of Google Hacks (both from O'Reilly Media).

Bausch developed a keen appreciation for Yahoo's commitment to its Web APIs when Google curtailed support for the search API it had been offering based on SOAP (Simple Object Access Protocol) at the end of 2006. Although it didn't cut off access to existing users, Google stopped issuing application key codes that would let people build new applications on the service. The alternative Google promoted was more of a user interface widget than a Web service. That came as a shock to Bausch, who had built most of his Google Hacks examples around the SOAP API. "I guess they viewed it as sort of an experiment," he says.

Yahoo also wins points for building most of its Web services around REST (Representational State Transfer) as opposed to SOAP, Bausch says. Yahoo does have SOAP-based APIs for Yahoo Mail and its search marketing service. But by making those the exception to the rule, Yahoo appeals to Web developers who consider REST a simpler way of invoking remote services. The very features that make SOAP more sophisticated (and the favorite in enterprise environments) also make it complicated— every invocation of a remote service must be formatted in Extensible Markup Language (XML), with the actual message for the remote computer wrapped in an XML-based envelope, and the reply must be formatted similarly.

With REST, the invocation can be as simple as using the Web's GET command, much like a user retrieving www.somesite. com?query=myquery and getting back an answer in relatively simple XML.

Some Yahoo services also support alternative encoding schemes, such as the JavaScript Object Notation (JSON), which saves JavaScript programmers the trouble of parsing results returned in XML.

So while Google continues to generate excitement around the API to its mapping services, Yahoo provides the best Web services for many other functions, Bausch says. These include Yahoo's term extraction service, which identifies the most relevant keywords in any block of text, and its geocoding service, which returns map coordinates for addresses.

In addition to these back-end services, Yahoo shares what it has learned about front-end Web development in its Yahoo User Interface toolkit, a set of components developers can download and embed in their own Web applications. "For developers, it's kind of an easy way to get a peek under the hood because the YUI is what we use on the home page of Yahoo.com," says Chad Dickerson, head of the Yahoo Developer Network.

The YUI represents years of work on delivery of everything from consistently formatted Web pages to more elaborate techniques such as animation. Inconsistencies among browsers in implementation of JavaScript, Cascading Style Sheets, and even different versions of the same browser, have always been a challenge for Web developers, and the YUI is only one of many solutions. But the existence of the YUI means if you see a nifty user interface effect on a Yahoo Web site, you may be able to plug it into your own site easily. The interactive calendar widget on Southwest Airlines' site, for example, comes from the YUI.

Nik Kalyani, cofounder of open source software startup DotNetNuke, says he has worked with both the YUI and Yahoo's search APIs and has been generally impressed. He appreciates the depth of the documentation behind the YUI and that its license allows for unrestricted commercial use. In particular, he appreciates the base components designed to level the playing field between browsers for uniform formatting and script processing. As for Yahoo's Web services, he particularly appreciates the API for contextual analysis. "It is really useful to extract tags from blocks of text and the results are, it seems magically, accurate," Kalyani says.

"We have this Internet infrastructure we've spent a decade developing, and by opening it up we're making sure the world knows it's here and available for the world to build on," Horowitz says. The free services and software are particularly attractive for startups trying to conserve capital, and sooner or later Yahoo will wind up buying some of those companies partly because of the technological ties it has forged with them, he says.

Benefits are also accruing to product teams such as the one behind Yahoo Real Estate, which has been seeing positive results from a recent series of Web site upgrades. "We're at the beginning of a mashup product strategy where we're leveraging a lot of internal capabilities, as well as Web services that have become available in the real estate sector that help us work with all our newfound partners," general manager Michael Yang (no relation to CEO Jerry Yang).

Over the past year, the site has risen from 15th to second (behind Realtor. com) in ComScore's traffic rankings, with much of that improvement coming from new features that incorporate multiple internala nd external Web services. A popular addon in a home-valuation tool that presents estimates from three partner sites and pulls in relevant commentary from Yahoo Answers.

Yahoo has a regular "refresh" schedule for its Web sites, but the Real Estate site, created in 1998, had been essentially unchanged since 2004, according to Yang. Since overhauling that site last year, Yahoo has committed to release further improvements every three to six months.

Yahoo uses essentially the same Web services approach to internal application integration that it applies to its public APIs, but internal developers also have access to other, private APIs and to enhanced versions of the public APIs, according to Steve Schultz, director of products for the Real Estate group. Similarly, the YUI serves both internal and external audiences, giving developers a base set of user interface components, with welldocumented guidelines for effective use.

"Just having that core library of knowledge and then skinnying it down to best practices and templates really saves you on time to market," Yang says.—D.F.C.

Player Roster

JERRY YANG
CEO and Chief Yahoo
Yang cofounded Yahoo, which he created with David Filo in 1994 while both were electrical engineering PhD candidates at Stanford University. He has been a guiding force behind the company's growth since it incorporated in 1995, but only became CEO this summer.

TERRY S. SEMEL
Chairman
Semel became chairman and CEO in 2001, replacing original CEO Tim Koogle. He ceded the CEO role to Yang this summer under heavy criticism over Yahoo's missteps, particularly in search marketing. But Semel is also the leader who helped right the ship when Yahoo was suffering in the wake of the dot-com bust. Previously, he spent 24 years at Warner Bros., where he rose to chairman and co-CEO.

DAVID FILO
Cofounder and Chief Yahoo
Yahoo's cofounder remains intensely interested in the company's technical choices, often involving himself in hardware and networking decisions. But he shuns the limelight and seems not to covet any title more specific than Chief Yahoo.

SUSAN DECKER President Decker has been the driving force behind Yahoo's recent reorganizations, which were intended partly to unify Yahoo's display and search advertising sales forces. Hired as CFO in 2000, she took charge of Yahoo's advertiser and publisher divisions in December 2006 and was bumped up to president in June. Previously, she was global director of equity research at Donaldson, Lufkin & Jenrette, where she worked for 14 years.

ASH PATEL
Executive Vice President, Platforms
and Infrastructure Division Since starting at Yahoo in 1996, Patel has played a key role in architecting and enhancing MyYahoo, Yahoo Finance, Yahoo Messenger, Yahoo Chat and many other products. He is responsible for Yahoo's global technology investments and platform initiatives, overseeing divisions including Product Platform Engineering, Platform Strategy & Architecture and Advanced Development.

USAMA FAYYAD
Chief Data Officer and Executive Vice President, Research & Strategic Data Solutions Fayyad guides Yahoo's overall data strategy, including privacy policy, prioritizing data investments and managing the company's analytics and data processing infrastructure.

A PhD with degrees in both computer engineering and electrical engineering as well as computer science and mathematics, Fayyad previously put his data mining expertise to work for Microsoft Research, NASA's Jet Propulsion Laboratory and two startups of his own. He joined Yahoo in late 2004 and in 2005 championed the creation of the Yahoo Research organization charged with developing "the new sciences of the Internet."

BRADLEY HOROWITZ
Vice President, Yahoo Product
Strategy Group

Horowitz has become a prominent promoter of innovation within Yahoo, which he joined in 2004. As an entrepreneur coming out of the MIT Media Lab, he founded Virage, maker of a multimedia search engine, and served as an executive of Autonomy after it purchased Virage. He has championed key Yahoo acquisitions such as Flickr and promoted programs to encourage innovation, including Brickhouse, the company's internal new-product incubator, and the opening of the Yahoo platform to outside developers.


[A Brief History of Yahoo]
One Step Forward, Two Steps Back

Born in 1994 as "Jerry's Guide to the World Wide Web," Yahoo started life as a Web directory created by Jerry Yang and David Filo while both were in the electrical engineering PhD program at Stanford University. Yang came up with the concept and Filo made the technology work. Yahoo incorporated in 1995 and went public in 1996, a year after Netscape, the original dot-com darling.

Originally, Yahoo was a hierarchical directory assembled manually by a team of editors; to search on Yahoo was to search that directory rather than the Web itself.

For algorithmic search, whereby software analyzes a Web sampling and determines the content most relevant to a given query, Yahoo partnered with others, starting with AltaVista in 1996 In 1998, Stanford students Sergey Brin and Larry Page asked Filo to consider buying or leasing their Google search engine for use on Yahoo. Filo said their technology was "solid," according to Google's corporate history, but encouraged them to grow the service by starting their own search engine company and show it to him again when it was fully developed and scalable.

In June 2000, Google scored one of its first coups, a deal to provide the search results on the Yahoo site. Just a couple of months later, Google announced the keyword- driven ad program that powered its subsequent growth.

But Yahoo was slow to react, which proved a costly mistake: Advertisers soon realized they could get higher clickthrough and conversion rates with search advertising than with display ads. And at pennies per click, search marketing was more cost-effective.

Google used other approaches to get ahead, too, including grid computing to drive down the costs of massive processing and storage required to index the Web. Google spends five to eight times less per user on storage than Yahoo, which uses more mainstream enterprise storage from vendors such as Network Appliance, according to storage consultant Robin Harris. Cutting storage and processing costs is critical to Yahoo's profitability: "If they can get their infrastructure cost into the ballpark with Google, they still have a very strong base to work from," Harris says.

However, Yahoo chief data officer Usama Fayyad says outsiders don't give the company enough credit for cost control, saying, for instance, its deal with Network Appliance is so favorable "it doesn't make sense to use anything else" for many apps.

Yahoo is also promoting the open source Hadoop project, a clone of Google's distributed computing technologies. (For more on Hadoop, see http://go.baselinemag.com/hadoop.)

Portal vs Anti-Portal

By most accounts, though, Yahoo's bigger mistake was not recognizing the revenue potential of search.

While Yahoo was busy building a comprehensive Web portal, Internet users who just wanted to search learned to bypass Yahoo's clutter for Google's minimalist home page, which started as only a keyword entry blank, search button and logo.

It wasn't until 2004, as Google prepared to go public, that Yahoo launched its own search engine. The technology came from a string of acquisitions, including Inktomi and Overture, which had acquired AltaVista.

Even after its 2003 purchase of Overture, which had essentially invented the search advertising model Google was then perfecting, Yahoo failed to aggressively exploit or improve its search marketing technology until fourth-quarter 2006. That's when it finally delivered its long-awaited Project Panama, the system advertisers use to target ads against a set of keywords and organize them into campaigns, bidding for top placement in an auction-based marketplace similar to Google's AdWords.

Panama Problems

The same year Filo met with Google's cofounders, 1998, also saw the rise of GoTo.com, later renamed Overture Services. GoTo.com's twist on search was that it accepted paid listings, encouraging advertisers to outbid each other to capture the top spot. As academics, Brin and Page had worried that advertising would corrupt the objectivity of search results. But under pressure to make money, Google's leaders decided to accept keyword-driven ads provided they were separate and distinct from objective search results. Google also tweaked the advertising model, making the most clicked-on ads float to the top of the listings.

Yahoo countered by buying Overture (eventually renamed Yahoo Search Marketing). But then what happened? The search marketing business continued to grow and bolster Yahoo's bottom line, but efforts to improve it and better integrate it with the rest of Yahoo were left in limbo, according to former employees.

"The Overture leadership had recognized, even well before the Yahoo purchase, that there was a need to rebuild the platform," says Ken Rudman, who was senior product manager for the Panama Project's Web services interfaces.

One reason the overhaul didn't happen quickly is that Yahoo wanted to make basic changes to Overture's technology first to be sure it would scale. But with Overture operating as a separate business unit in the Los Angeles suburbs, itsprojects didn't get the same priority as the Sunnyvale-based parent company's, Rudman says.

The original plan was to keep Overture separate so it could continue serving other sites that outsourced their search marketing (which at the time included Microsoft's MSN) as well as Yahoo. "So it was deliberate, but I think it was a mistake," says product strategy vp Bradley Horowitz. Planning for the Panama Project started in late 2005, building on the ashes of two previous efforts to overhaul the search marketing, and most development was completed during a well publicized push in 2006. "Yet much of what we wound up doing was very similar to what we originally thought we needed to do," Rudman says. The functional requirements changed very little, although Yahoo helped Overture operate on a larger scale, he says.

Christopher Rhude, another project manager who worked on Panama, says when he joined Overture in September 2004, almost a year after the acquisition, "there still wasn't a lot of knowledge of how we were going to move forward, overall, as part of Yahoo. Yahoo thought they had bought a cash register, but it was grossly more complex than a lot of the systems they managed, despite the scale being similar."

Where the goal should have been to integrate Overture's assets into Yahoo, "there was a certain us-vs.-them mentality and dismissive politics on both sides," Rhude says.

To be fair, the Sunnyvale engineers had reason to doubt Overture's ability to execute, Rhude adds. Earlier, stalled efforts to overhaul the search marketing platform had been organized around three-month internal software release cycles. "That led to a break/fix cycle that was very oppressive," he says, because by the time quality assurance saw the code, so many changes had been made, it was hard to track bugs. With Panama, the search marketing developers shifted to shorter, incremental software, which kept the project moving faster, with less time on "triage," Rhude says.

A former Panama quality assurance team member, who asked that his name be withheld, says the project hewed too far toward a sequential "waterfall" software methodology as opposed to the more agile, incremental development style practiced elsewhere at Yahoo. Worse, scheduling was driven by top management's pronouncements to Wall Street rather than a realistic assessment of the project, he says.

When the schedule slipped by just a few weeks and Yahoo failed to deliver Panama in Q3 2006 as promised, the intense stock market reaction made management redouble the pressure to ram the project through to completion.

In the end, these expats say, they were proud of the quality of the system they created, but they weren't motivated to stick around and make ongoing improvements.

Panama was largely a game of catch-up with Google features, but it also included "a lot of innovation under the hood," Rudman says. "If they've done their work right, over the next year it will become apparent."

The application programming interfaces (APIs) Rudman's team worked on, for example, let advertisers place bulk orders (as opposed to entering ads one at a time into a Web-based user interface). Instead of imitating Google's APIs, the Panama team aimed to make theirs more flexible, he says. "The idea was to organize it in a different way, one that wasn't dictatorial about how to use the system."

"It's really clean and well thought out," says Alan Rimm- Kaufman, president of the Rimm-Kaufman Group, a search marketing firm that runs its own systems that connect with the Yahoo and Google search marketing APIs. During development, Panama engineers were receptive to sugggestions that made the product better, he says.

Yet Rimm-Kaufman still thinks Yahoo is about a year behind Google in search marketing sophistication. And when he sees the results Yahoo can deliver to his clients, "neither the quantity nor the quality of the traffic is there," he says. Yahoo shouldn't give up, he says, but he is concerned about whether the company can attract and retain the people needed to continue to improve the system.

Departing employees from across Yahoo say they're frustrated by its bureaucracy and bewildered by its reorganizations, according to an external recruiter who works with the company. Making recruiting and retention tougher, Yahoo can't offer the stock options and other perks Silicon Valley workers have come to expect in return for their long work hours, the recruiter says.

Rudman says it wasn't hard to decide to leave after the Panama system went live: "Most of what I had to deliver was finished in September [2006], and I left in April. I wound up feeling a little distant. A lot of people I respected were fleeing the ship."

Besides not seeing an immediate payoff in the value of their stock options, they felt let down professionally, he says. "I think after something that big, you need to be ready to tell people, 'Don't wander off, don't lose focus, here's the next challenge we have for you.' I did not feel my team was acknowledged, rewarded—like Yahoo cared about us."

Yahoo's Horowitz says the company recognizes attracting and retaining talent as a major challenge and is working harder to act cohesively, better integrate acquisitions and clear away bureaucracy that interferes with innovation.

"Those people who have left wouldn't have seen what I'm seeing," Horowitz says, because it's just happened since Yang took over as CEO. "It's amazing, the transformation that is happening. It's almost if I'm watching Jerry and David refound Yahoo before my eyes."

As for the former employees who lost faith in the company, it's probably better they "make room for others who see the potential," he says.

Yahoo Timeline

1994
Yahoo Web directory created by Jerry Yang and David Filo, two Stanford University PhD candidates, working on it in their spare time.

1995
Yahoo Inc. formed with Tim Koogle as CEO and the cofounders in more informal leadership roles—Yang the company evangelist and Filo the hardcore techie.

1996
Yahoo initial public offering. Stock rises 270 percent to $33 on first day of trading. Yahoo outsources keyword search to AltaVista.

1998
Yahoo acquires Internet direct marketer Yoyodyne Entertainment.

1999
Yahoo acquires GeoCities and Broadcast.com.

2000
Yahoo shares hit an all-time high of $475 (adjusting for stock splits, about four times the stock's current level). Yahoo outsources keyword search to Google.

2001
The dot-com bubble bursts, sending Yahoo shares to an all-time low of $8.11. Terry Semel takes over as Yahoo CEO and begins the process of rebuilding the company and forging new relationships with 2002 advertisers. At year-end, Yahoo announces acquisition of Inktomi search engine.

2003
Yahoo acquires Overture, which pioneered the paid search marketing model from which Google now profits.

2004
Google goes public, revealing just how lucrative search advertising can be. Yahoo replaces Google search with its own search engine, forms Yahoo Research arm to develop new technologies.

2005
Yahoo celebrates 10- year anniversary. Acquires Flickr (photo sharing), Upcoming (social event calendar), Del.icio.us (bookmark sharing) and MusicMatch (music sharing).

2006
Yahoo says Project Panama, a new search advertising platform, will be delivered in Q3—and incurs Wall Street's wrath when it delays launch until Q4. Yahoo reorganizes into three major operating groups: Advertiser & Publisher, Audience and Technology.

2007
Terry Semel resigns as CEO and is replaced by cofounder Jerry Yang. Former CFO Sue Decker, who had been running the Advertiser & Publisher group, is named president.

Next Page: Return of the CEO

Return of the CEO

Does Yahoo CEO Jerry Yang have what it takes to revive the company's fortunes?

Yang and David Filo created Yahoo while they were grad students at Stanford, but when they formed a company in 2005, they ceded top management duties to others, starting with Yahoo's first CEO Tim Koogle. Yang was always part of the management team, and often served as its public face, but until now he and Filo have shared the cheerfully vague title of Chief Yahoo.

That's one reason many skeptics, including former employees, doubt Yang can serve as Yahoo's equivalent to Apple's Steve Jobs—instead of returning to take the reins of the company he started, as Jobs did at Apple, Yang is taking leadership of the company for the first time.

The comparison strikes home for Chris Tung, a former Yahoo interaction designer who now works for Apple.

"In terms of innovation, you're always going to take a risk," he says, but at Yahoo things tended to get bogged down in "analysis paralysis"—fiddling with usability tests and metrics gathering to postpone decision making.

"You cannot have innovation by consensus," Tung says. "You need someone who has the clarity of vision, the confidence, sometimes just the utmost brashness to push it through." From a distance, at least, Yang never displayed those qualities, he says. "I never saw him, or anyone else there, have that clarity of vision, that ability to push things through."

Ken Rudman, a former Yahoo product manager, expresses more faith in Yang, calling him "extremely competent" and suggesting he has learned the ropes by working closely with Yahoo's previous CEOs. "I do think he could be successful," Rudman says. "Is he what Wall Street is looking for? I don't know."

Other former rank-and-file employees who spoke with Baseline, on and off the record, have at best lukewarm impressions of Yang's leadership skills, though some hold out more hope for Susan Decker, Yahoo's new president.

One former executive who believes Yang is the right choice is Tim Sanders. Sanders, who became part of Yahoo when the company acquired Broadcast.com, established himself as a closer of big deals as chief solutions officer, and still serves as DJ at the company holiday party. (After the publication of his book Love Is the Killer App, Sanders left in 2005 for a career as an inspirational speaker, writer and management consultant.)

Yang "has been groomed for years to do this, since the moment Yahoo began," Sanders says. "He's been part of every important meeting, every acquisition, every product release. He's a punch-you-in-the-arm, tellyou- that-you're-wrong kind of guy, but he also makes you feel good about your contributions. And he has such a passion for the Yahoo brand."

Although Sanders thinks Yahoo has made its share of mistakes, he says its current problems are "less about the things Yahoo did wrong than some breathtaking things Google did right. When the history of Yahoo is written, we're going to look back at this as a period of time, unfortunately longer than one would have hoped, of readjustment and realignment, and having a fierce competitor."

If the challenge is for Yang to channel Steve Jobs, Sanders says one way to do it would be to use the negativity about Yahoo as a motivator and challenge employees to prove the skeptics wrong. "I would show them all the negative press about Apple from 15 years ago," says Sanders, recalling a time when shrinking marketshare for the Macintosh seemed to spell doom for that company. "But they stuck to their guns, they found the iPod, and the world has changed."

In much the same way, Sanders says, "I think the public statements of arrogance from Google could be used as great motivators" to help Yahoo find its own next breakthrough product.

One sign Yang is thinking along the same lines: He invited Jobs to an October meeting of Yahoo—as a motivational speaker.—D.F.C