Mapping Yahoo's future

Mapping Yahoo's future
By Jim Hu
Staff Writer, CNET NEWS.COM

SANTA CLARA, California--Jeff Mallett is resigned to the fact that his chance of making a comeback with the Canadian national soccer team may already have faded now that he's 34. That's one reason why he has settled for his day job, running one of the Web's most well-known sites: Yahoo.

Mallett, who in January added "president" to his existing title of chief operating officer, has come a long way to attain his current role in the company but faces an even bumpier road ahead. As the Internet landscape changes dramatically at warp speed, Yahoo is working hard to stay at the top of its game.

It was a critical juncture early on that caused Mallett to turn away from a promising professional soccer career. After turning down an opportunity to go pro with the now-defunct North American Soccer League, Mallett opted instead to play under amateur status with the Canadian national team, appearing in two games. Then, he abruptly left the sport.

Instead, Mallett returned to Canada to begin a career in business. His first shot was with a start-up run by his father, which was eventually sold to Cable & Wireless. With money in his pocket, Mallett decided to make another go at school and enrolled at San Francisco State University, working by day and jumping in and out of night classes. He even considered business school, but he said that idea "lasted about three classes and I was bored silly."

Nonetheless, SFSU turned out to be the launch pad Mallett needed. He began working on a professor's business plan for a grammar- and spelling-check software system. The company, called Reference Software, was sold in 1992 to WordPerfect and eventually launched Mallett to Utah after Novell acquired the software. But as vice president of Novell's consumer division, Mallett "got bored."

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He then got a call from the nascent Yahoo in Silicon Valley and was flown down to meet with chief executive Tim Koogle and cofounders Jerry Yang and David Filo.

"I was just flat-out floored by these guys," Mallett said about the initial meeting. "And I fell in love, flew back, couldn't sleep that night...I stayed up all night, called them the next day, and said, 'Yeah, I'll give it a swing.'" And that was that.

The face of the Web has drastically changed since Mallett joined Yahoo in 1995. Back then, the space was defined by a handful of search engines run by Stanford grads. While the jury was still out on whether their business models would work, the fact remained that they had the ability to attract hoards of Netizens.

Since then, the search engine pioneers, which include Excite, Lycos, and Infoseek, have become some of the most desirable properties on the Web, with offline media giants and broadband companies taking stakes or partnering with them to create the Net properties of the future.

Yahoo at this point remains a lone gunman. Still not settling with a partner, the company is thought by many to be waiting for the right time to make the right move, and its competitors are nipping at its heels. The company told analysts recently it expected to enter a pact with a broadband partner by year's end.

CNET News.com caught up with Mallett at Yahoo's pervasively purple and gold headquarters in Santa Clara, California, to discuss the importance of partnering with traditional media, its acquisition of Web community GeoCities, the ever-present Microsoft threat, and another possible career change to his other athletic passion: ice hockey.

CNET News.com: How does someone who comes from a software background end up running one of the largest new media companies?
Mallett: I think a lot of it had to do with the fact that back then, "this" hadn't been defined. "This" being the Internet, "this" being general business models, and especially "this" being Yahoo. So it wasn't a direct correlation where you had to have a core skill set. I think what I picked up was that software was "soft," meaning that it was built by creative people; ours was consumer software for the masses. It was delivered over a PC, so fundamentally I'd say my canvas has always been the PC interface.

[Software companies and Yahoo] have some commonalities. You have creative people, you have engineers, you have this sort of mixture of people so that you can put up as good a product as you can.

A lot of people say portal companies without a traditional media background need to find people with that experience to run their companies, yet no one really says that about Yahoo. Why is that?
I think it goes back to my point of being in early enough, being totally focused on a consumer, having a huge customer base who's been telling us what to do and watching it take place. And I think we've learned. Obviously we understand this medium. In the early days, though, you bet we were always saying, "Geez, do we need that media guy from Disney? Do we need someone from Time Warner?" And the board and all of us were looking at that. We grew fast enough to say no.

Do you think the remaining companies that don't have a media presence need one?
I think that coming in today would be extremely challenging for someone who has not had media or communications experience or who is in an environment where you are publishing to a large audience on a daily, hourly, minute-by-minute basis. I think they're going to be challenged to be able to step in and run a large-scale business in the broad media business. It's going to be tough.

NEXT: Yahoo's partnership plans

Yahoo's partnership plans

Now that people are saying that portals need a traditional media partner for distribution and offline promotion, do you think Yahoo needs that same kind of partner?
What the media companies bring is these powerful media marketing machines. We always said that the trade-off would be in two parts: equity in the company and control of management and--way more important--editorial control. That was usually a part of these offers, which said, "Company X, we want to invest in you guys. We want to squirt some management in here and we want you to carry our news, our sports, our whatever." And we think at that point you're not viewed as truly independent.

So the announcement with News Corporation [in which News Corporation will join nine of its entertainment and news outlets with Yahoo to reach new audiences through a combination of media, marketing, and programming initiatives] was for me, personally, one of the happiest days here at Yahoo where we've shown that we've got critical mass and built our business. We have real money flowing in the business that we can secure, just good, old-fashioned business alliances to secure that promotional machine in a unique way.

Because News Corporation and Fox were interested in getting promotion on our machine, no equity changed hand, no management changed hand, and there was no obligation for us to carry any program. That was a major event in the history of our business to be able to do that.

Rupert Murdoch has publicly said that the Internet is not ready for a major investment from News Corporation. Do you and Murdoch see eye to eye in the sense that it's more about distribution, not necessarily about equity?
Yeah, News Corporation has been very consistent. We've had an ongoing dialogue with Rupert and his team for a year, year and a half, and they've always said that. But doing a sort of front-end portal on the Web has not been a part of their plans. They tried it before. I remember going way back, waking up in February 1996 when I-Guide was News Corporation's Yahoo killer. They were going to bring us down--it was going to be 60 days, and we would all be out of a job.

And they've given it a couple of swings but probably haven't realized their core competency. How do they take what they're good at and distribute and promote it on the Web? Yahoo's got a great promotional machine and marketing machine, as you know. They stick to their knitting, we stick to our knitting, and that's why the relationship is perfect.

Can your relationship go deeper at this point?
I hope so, but there are no hard plans. They are just like us: "Let's get this main piece. Let's supercharge both of our businesses. Let's prove this concept. Let's drive the audience offline to the Yahoo properties. Then, let's check in after three or four months and say, 'OK, now what? What next?'"

You brought up an interesting point with I-Guide. A number of media companies have tried to develop "Yahoo killer" products, including Time Warner with Pathfinder. Are those companies an example of how offline media companies can't really build it themselves at that point?
If "it" is what we refer to as a global branded Web network that is independent and can package up all sources and put it out to consumers, can they do that? They haven't shown that they can. They're taking another approach to it via acquisitions, as with Disney's acquisition of Infoseek, to get some of the core competencies they didn't hold.

I think what they're absolutely best at is building destination services on- and offline--on television and the Web. ESPN.com is a great example. We need them to flourish and be awesome at doing that--to be that independent aggregator. I think they're going to be challenged to do that. We'll respect them. They've got their marketing machine that we talked about earlier, but is it a slam dunk for them to all of sudden be zoomed in to the No. 3 or No. 2 slot? Unlikely.

What if they acquire their way in?
They're trying to do that, but when you buy something that's now like the seventh- or eighth-ranked network, like an Infoseek or NBC buying into Snap, you've got a lot of work to do. It's not like you're able to buy one of the big three: AOL, Microsoft, or Yahoo, right?

[Snap is a joint venture between NBC and CNET: The Computer Network, publisher of News.com.]

NEXT: Eyes on the prize

Eyes on the prize

Now let's get into some of those competitors you're talking about. AOL, Microsoft, and @Home/Excite are heavily invested or involved in some sort of access, from cable modems to dial-up networks. Has it come down to access? Is access something Yahoo wants to get into?
The way we've approached this is we've built the business and plan on continuing to build this business, access-independent. If we build the largest audience, a broad suite of services, critical demand, and a brand that people will recognize, then we can get access. The great thing about the Web is that it doesn't matter how--you can always get access from any point. Yes, it's difficult to access Yahoo off AOL. Yes, it's probably going to be difficult to access Yahoo off @Home, but you can get there.

We wouldn't have been at 50 million unique visitors in December if we had done what AOL wanted us to do back in 1995, which was to basically sit on their proprietary network. Prodigy wanted to do us in the early part of '96; CompuServe wanted to do it when they were still an independent entity. We've had a number of chances, such as with AT&T, but that narrows our scope. It feels better for a second because you know you've got direct access, but from our standpoint--even if it means being the No. 2 offer as someone comes into a particular access--we'd rather have a secondary offering as long as we can keep our independence and have the ability to work with multiple players.

How do you find the room to be a second-fiddle player with all these primary access points?
"Second fiddle" is probably the wrong word to use. You see, even if you go to another service, you're going to bump into Yahoo, right? Somehow you're going to bump into Yahoo. Other people's searches pull up Yahoo--you're going to bump into us. Once people try us, they like us.

You brought up instances of people--access providers--taking you guys in. What about the other way around? What about you guys taking in an access provider?
Same strategy of being independent. It doesn't matter whether we own that entity and say all of a sudden that now we own a national access provider, be it dial-up to broadband. It's still betting the farm on being able to get customers to sign up through us. We want to be their media and communications layer, and we want to remain independent. But we don't want to own an access provider and be in that battle, which is a low-margin, difficult business, and another front we would have to defend.

To be blunt, Microsoft's had access forever, and the access has not brought them to critical mass. If you look at their recent rise, which they've done well, it's due to great programming and great content: Carpoint, Expedia, and the way they've cleaned up MSN has to do with programming, but it's not because they've had great, inexpensive access underneath with their partners--that hasn't been the driver.

AOL has access because they grandfathered it, right? Thirteen years ago they started the access part of it. Wonderful business--good for them, great job--thank God they've been successful, or we wouldn't be successful. They've helped build the space, but now to try to jump in on that? It's not what we plan to do.

During your analyst call for your fourth-quarter earnings in January, you mentioned the possibility of developing a subscription base. What sort of models are you looking at?
If we can do a free service, that is our goal. We'll do everything within our powers to create a free service when people come to Yahoo. The good thing is we get this critical mass and it gives us greater leverage. It allows us to carry stuff that may have been paid before and not even available before. That is our goal.

You also made a reference to developing e-commerce initiatives through GeoCities. Can you elaborate on that?
Sure. There's a couple of opportunities. These homesteaders are Webheads, right? If you set up a personal home page, you tend to be one who's on the Web a fair bit. So that's a channel we plan on taking on Yahoo Direct or in our services in the direct marketing and permission base going through there.

If you look at the GeoCities' last few hundred thousand, almost a million new people coming in and publishing home pages, they have a business component to it. So we see it as a good platform to drive new stores. The result is what we think is a great affiliate network. You get a very broad base of stores (over 3,500 today on Yahoo) that should grow considerably.

We're not trying to blast ads that aren't relevant and which they don't get a piece of; we're actually conducting commerce that is relevant to their business, their interest, their community, providing a platform that's manageable and giving them a piece of the transaction that comes through.

Do you anticipate further acquisitions down the line?
You bet. [Consolidation] will continue to happen. The big are going to get bigger. Great niche players are either going to hunker down and be awesome niche players and live happily ever after, or they're going to want to pop up and partner with companies.

We've been real open. We're very fortunate to have equity that people are interested in holding in Yahoo stock. Acquisitions is a part of our growth strategy. We still think a big portion, the majority, will come from organic growth. The second piece will come from our good business relationship--opening gateways, getting distribution, and building an audience. But a third piece will definitely come through acquisitions, and we don't plan on slowing down.

Do you feel more pressure now that you've been appointed president?
On a personal note, no, I don't feel any different. I always felt I had this huge responsibility to build this organization. We're very fortunate because [chairman Tim Koogle], Jerry, and myself, we're three amigos, we're a team. So I don't feel the singular burden as president, while in some other companies it would probably be up to me to make that final call.

As far as feeling the pressure--I always felt the pressure from day one.

So what's your next career move: the San Jose Clash or San Jose Sharks?
There you go! Yeah, I'd like to play. Let's see--[Sharks goalie] Mike Vernon is going to retire soon...