The Economist Asks: Is Terry Semel the right man to lead Yahoo! against its nimbler rival?

As reported in today's Economist.

JERRY YANG, who co-founded Yahoo! and remains on its board, says that the internet company is in the middle of a “transformation” and that its board members are “all in lockstep” behind Terry Semel, the chairman and chief executive. Meg Whitman, the boss of eBay, a Silicon Valley neighbour as well as an advertising partner to Yahoo!, says that Mr Semel has done “a spectacular job” and is “well loved at Yahoo!”. Clearly, Mr Semel has a lot of impressive supporters.

He may need them now. Mr Semel became Yahoo!'s boss six years ago this month, after a long and distinguished career in Hollywood, where he ably led Warner Brothers, a film studio. He had a good start at Yahoo!, turning losses into profits, although some of the credit for this was down to timing: he arrived during the trough of the dotcom bust, when the online advertising market was just about to recover. Of late, however, Mr Semel has been taken aback by the astonishing rise of Google, which today dominates the market for web-search and keyword-related advertising, having left Yahoo! far behind. His fate at Yahoo! now depends on whether it can catch up with its more agile rival.

Increasingly the view on Wall Street is that Yahoo! by itself cannot catch Google, so it must either merge with a compatible partner—eBay has been mentioned—or, more likely, sell itself for the highest possible price to Microsoft, a software giant that has fallen even further behind Google in its web business. Yahoo! and Microsoft have been talking, off and on, since last year.
This union of two also-rans against the winner has a clear logic. Microsoft once licensed Yahoo!'s search and advertising technologies (Inktomi and Overture, respectively) before building its own, so the technical integration ought to be feasible. Both Microsoft and Yahoo! have far more users than Google does in services such as web-mail and instant-messaging, and together would be formidable. However, melding the two firms and their cultures would distract the new company for at least a year, during which Google might speed ahead even further.

For Mr Semel, who is 64, a sale might also hold the appeal of a graceful exit. It would be a rueful one, however. Back in 2002 Mr Semel considered buying Google, which was just then rising out of obscurity, but balked at a price in the single billions (Google's stockmarket value today is $145 billion, about 3.5 times that of Yahoo!'s). Having belatedly grasped the money-making potential of web-search, Mr Semel then bought Inktomi, another search engine, and in 2003 he bought Overture, the pioneer of paid-search advertising.

But Inktomi and Overture languished ignominiously inside Yahoo!, which Mr Semel was simultaneously trying to turn into a new sort of media company. With much fanfare, Mr Semel even opened a Hollywood branch—in Los Angeles under Lloyd Braun, an old-media star—to produce content. This turned out to be a misreading of industry trends, so Mr Semel soon switched the emphasis towards “user-generated content” and, during a corporate reshuffle this winter, closed his Hollywood branch and bade farewell to the hapless Mr Braun.

During all this, Google was outmanoeuvring him not just technologically but also strategically. Mr Semel was at one point talking to his old-media friends at Time Warner about buying AOL, its web portal and a natural fit. But Google swooped in and took a defensive equity stake. Mr Semel was interested in YouTube, a video site built on user-generated content, but Google bought it instead. He wanted a social-networking site, but couldn't capture Facebook and lost an advertising deal with MySpace to Google. He wanted to buy DoubleClick, a firm that specialises in online display advertising, where Yahoo! is the leader, but Google again pre-empted him. So Mr Semel has had to content himself with consolation prizes. Last month he bought Right Media, a display-advertising firm far smaller than DoubleClick. In search advertising, Yahoo!'s weakest area, he has launched Panama, a new system for placing text advertisements that appears to be as good as Google's in drawing mouse clicks and thus money, and which is Yahoo!'s greatest hope.

The odd man out?

The question for Yahoo!'s shareholders, and thus its board, must be: is that enough? “First you have to get to parity before you leapfrog,” says Ms Whitman, in defence of Panama as well as Mr Semel. (A leapfrog may seem unlikely, given Google's reputation as an innovator, but its diversification into so many fields beyond web-searching might yet cause it to stumble.)

The view among the engineers of Silicon Valley is different from Ms Whitman's. They see Mr Semel as the odd man out in their industry. Google is led by esteemed computer scientists: its founders, Sergey Brin and Larry Page, and chief executive, Eric Schmidt. Microsoft has Bill Gates as chairman and Ray Ozzie, a titan of engineering, as software architect. Mr Semel, by contrast, was a Hollywood dealmaker who did not use e-mail before his arrival at Yahoo! in 2001. He has learnt a great deal about technology since then, of course, but an online-advertising entrepreneur, who deals with all three firms, says that Mr Semel still does not know enough “to go deep with the innovators”.

Instead Mr Semel, charming and funny in private, increasingly resorts in public to pre-cooked, vague grandiloquence laden with the jargon of “Web 2.0”. The founder of another online-advertising company, who counts Yahoo! as his biggest customer, even compares him to Chance, the character played by Peter Sellers in the 1979 film “Being There”. Chance is a gentle gardener whom fate thrusts into the high society of Washington, DC, where he is mistaken for a profound genius as he regurgitates gardening phrases that he has heard on television (“In the garden, growth has its seasons”). In Chance's case, however, the doubters kept quiet. Mr Semel's critics are getting noisier.

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