How Yahoo! Aims To Reboot

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By 2005 the company's focus was adrift. It had dabbled in creating content, a strategy it later cut back on, and had fallen further behind Google in generating revenue from its huge audience. Last November an agent provocateur emerged in Brad Garlinghouse, a senior vice president, whose leaked memo became known as the Peanut Butter Manifesto. He argued passionately that Yahoo! was wasting its talent by distributing its resources like peanut butter on a widening slice of bread. "The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular," Garlinghouse wrote. "I hate peanut butter. We all should." He criticized the company's services for competing with one another and recommended an overhaul of the ungainly corporate structure. "We lack decisiveness," he added, and "we are held hostage by our analysis paralysis." Garlinghouse got part of his wish. Yahoo! reorganized management. And it is reducing redundancies. For instance, interfaces for presenting video have been winnowed from 16 to eight.

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Significantly, Semel (who declined TIME's request for an interview) is getting Yahoo! to decide what it wants to be when it grows up. "There's always been some ambiguity about whether it's a tech company or a media company," says Stewart Butterfield, Yahoo!'s director of product management and co-founder of the photo site Flickr, which Yahoo! acquired in March 2005. "But there's been a shift in the internal messaging. I never hear execs refer to Yahoo! as a media company. A year and a half ago, there wasn't a satisfying articulation of what the mission of the company was. That has changed."

The Flickr deal turned out to be a critical one. Butterfield says he chose to sell to Yahoo! rather than Google because the former was a more disciplined company. "At that time, Google was especially chaotic," says Butterfield. Google bought YouTube, which has generated a mountain of buzz, but Yahoo! has quietly leveraged Flickr, Answers and Del.icio.us, among other recent acquisitions and launches, to get its audience--which includes nearly half of the world's Web users--to spend more time on its network of sites. Yahoo!'s new ad system will capitalize on their presence--and on data it collects from their interactions--more efficiently, with more carefully targeted ads.

Yahoo! is a more popular website than Google but not as lucrative. Yahoo!'s 500 million monthly visitors easily exceeds Google's 380 million. But Google searches each generate about 30% to 40% more revenue. "Yahoo! is three to four years behind Google in the development of its algorithm," says Jordan Rohan, an analyst with RBC Capital Markets.

Advertisers are increasingly eager to focus campaigns around search ads. Panama gives them a new, cleanly designed online spot where they can plan, track and change ad campaigns in progress. It may help improve Yahoo!'s return on investment in that arena because it gives advertisers more leeway in targeting specific geographic areas. A pizza-shop owner can pinpoint his pitch to local diners who search for pepperoni, for instance. "Geo-targeting is huge," says Neisser. The company is also adding a mobile search tool that will eventually extend Panama's reach to cell phones. The new services should help Yahoo! close the revenue-per-search gap, although the improvement probably won't show up on its balance sheet until midway through 2007.