How Yahoo! Aims To Reboot

It can't be easy for Yahoo!, the Internet's most durable portal, to play Pepsi to Google's Coke. But if Yahoo! continues to fall further behind Google in ad sales, the company may find itself stuck a perennial second--or worse. With its stock down 36% last year and ad sales failing to keep up with Google's, Yahoo!'s reputation has suffered as Google's stock has soared.

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So Yahoo! is in the midst of a massive reorganization to focus on what matters: wringing more money from its ads and more time from its community. That hasn't been easy for a company that has divided its attention among dozens of products and services. "Yahoo! is many things to so many people, whereas the beauty of Google is that at the end of the day, it's search done well," says Drew Neisser, CEO of Renegade Marketing Group, an ad agency.

In January, Yahoo! announced that Panama, a new advertising platform central to its shift in strategy, would debut Feb. 5, refining how the company sells ad space. The system gives advertisers more control over their ad campaigns, letting them freely change keywords or ad strategies to adapt to what's working. It also enables Yahoo! to highlight ads relevant to a user's search rather than ordering them simply according to who paid more. Because search advertising accounts for nearly 50% of Yahoo!'s revenue, Panama is critical to its growth.

CEO Terry Semel had downplayed the system's repeated postponements, calling Panama an undertaking as big as any product launch ever. But there was a price to pay for the delay. "A lot of people [at Yahoo!] feel abused by the outside world and its perception of the company," says Ellen Siminoff, one of Yahoo!'s founding executives, who heads search-advertising agency Efficient Frontier. "They have missed a few quarters this year, they have lowered expectations, they were late in delivering Panama, and so they're in the penalty box with Wall Street."

Panama is just one piece of the reboot for the 11-year-old company. Yahoo!, based in Sunnyvale, Calif., also reorganized its 11,000 employees in December from many overlapping subgroups into three distinct business units: Web communities, advertisers and infrastructure. Susan Decker, the company's chief financial officer since 2000, was promoted to oversee the advertising group, a signal to analysts that she might be in line to succeed Semel.

The taming of Yahoo!'s many-headed beast echoes the task Semel took on after arriving in 2001. He trimmed the 44 business units to four, and the company rededicated itself to search by developing a new engine and buying Overture, which pioneered search ads. Yahoo!'s stock price nearly tripled in Semel's first three years, but its search tools still trailed Google's.