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Google vs. Yahoo: Clash of cultures

news analysis They're after the same advertisers, but the Internet giants are taking different paths to get them.

A correction was made to this story. Read below for details.
news analysis On the walls of Yahoo's modest Silicon Valley offices there are posters with sketches of oddball inventions that have landed patents, such as a portable bird cage. The point: If a bird cage can get a patent, Yahoo's employees can come up with something big if they put their minds to it.

The posters are promoting a program called the "Idea Factory" that is supposed to goose inventive thinking at the 10-year-old Internet-giant-turned-media-powerhouse. Through Idea Factory, staffers are urged to submit notions for improving everything from the company's products to its campus.

Five miles down the road at offices of archrival Google, inventive thinking is assumed. At Google, engineers are expected to spend one day a week on a project of personal interest. It's a mandate that's spawned new services such as Google News, which now attracts 7.1 million visitors per month, according to Nielsen NetRatings, and the social networking site Orkut, which has yet to be integrated into the search site.

News.context

What's new:
Yahoo and Google are taking different paths in the quest to be king of the hill in the search sector.

Bottom line:
The tug-of-war between the two companies is really a test of what kind of corporate culture an Internet company needs.

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As the two giants tussle for domination of online advertising dollars, it's increasingly clear that this tug-of-war is really a test of what kind of corporate culture an Internet company needs: Is it a by-the-numbers and increasingly Hollywood-savvy environment like Yahoo's? Or can an intellectual playground like Google continue to grow and thrive even as it approaches $4 billion in annual revenue?

The answers to those questions could have a lasting impact on how Internet companies are formed in years to come. If Yahoo comes out on top, investors could insist on a chief executive like Yahoo's Terry Semel, a longtime Warner Bros. executive known for his media savvy and no-nonsense directives. If Google continues its rocket ride, they could look to an Eric Schmidt, a passionate technologist by training and education who is happy to let his engineers steal the limelight.

"Google is...all about individuals fulfilling or exceeding their potential, and employees are given significant license to foster this," said Geoffrey Moore, high-tech guru and author of the popular management tome "Crossing the Chasm." Yahoo used to be like that, Moore says. But under Semel, who took over Yahoo's corner office four years ago, it has morphed into a more mature company with tough management discipline, but perhaps lacking the creative giddiness it had in its early years.

The two companies share a common DNA but are taking divergent paths. Yahoo's co-founders David Filo and Jerry Yang were doctoral candidates in electrical engineering at Stanford University in 1994 when they started work on their first search engine. Two years later, Google's founders Larry Page and Sergey Brin also collaborated as Stanford doctoral candidates on a search engine called BackRub, a predecessor to Google. Page's dorm room was the company's first data center, and the two entrepreneurs even called on their friend Filo for advice before starting Google in 1998.

"The biggest difference right now is Larry and Sergey still run Google, and Terry Semel has a much bigger say at Yahoo," while its co-founders aren't typically involved in day-to-day operations, said Danny Sullivan, editor of Search Engine Watch.com. "Google is still infused with the whole Larry and Sergey spirit, if you will."

It's not just the cultures that clash. The two companies' businesses also are on a collision course, competing for the same Web visitors and advertising dollars. In the last three years, Yahoo has reshaped one of its core businesses around Web search and related advertising, making itself second only to Google in search ad dollars, with technology that many believe is keeping pace with that of its younger rival.

Google--in roughly the same time span--has broadened its business to do something its executives said they didn't want to do: Become a

 

Correction: This story reported a misleading figure for Yahoo's revenue for the first three months of 2005. For that period, the company's revenue was $1.17 billion.
portal like Yahoo that offers services like free Web e-mail, social networking, publishing tools, maps, shopping, news and video search, and now brand advertising sales.

"There's a constant focus on each other," said a former Yahoo employee who asked to remain anonymous. "We (would) know everything they're working on, they (would) know everything we're working on."

They're fighting over a bigger cut of the currently $8 billion global search advertising business, which is expected to be worth $22 billion in five years, according to Piper Jaffray. What's more, search ads are increasingly part of lucrative brand advertising campaigns. Worldwide online brand advertising is expected to grow 21 percent this year from $11.3 billion to $18.2 billion, according to Goldman Sachs.

Terry Semel
Terry Semel
CEO, Yahoo

So far, both companies are prospering. In the first three months of the year, Google reported revenue that doubled year over year to $1.26 billion with net income of $369.2 million, nearly six times more than in the comparable period in 2004. Yahoo's revenue during the same time rose 35 percent to $1.17 billion and net income doubled to $205 million. Yahoo's market capitalization is $51 billion; Google's is $76 billion.

But the approaches these two companies are using to go after the same advertising dollars are remarkably different, and are a reflection of the skills of their top executives.

Semel shakes up Yahoo
Semel arrived at Yahoo at perhaps the lowest point in its history, replacing popular chief executive Tim Koogle four years ago. He brought with him a reputation as a no-nonsense businessman with an eye for the big picture and a Rolodex filled with Hollywood contacts.

Jerry Yang
Jerry Yang
Co-founder, Yahoo

A year later, Semel brought in Dan Rosensweig as the company's chief operating officer. Rosensweig, a former executive at CNET Networks (the publisher of News.com), clamped down on spending and made individuals accountable for the profitability of their divisions.

That's not to say they didn't spend aggressively on acquisitions. From 2002 to 2003, Yahoo bought search engine Inktomi for $235 million, employment site HotJobs for $436 million, and commercial search pioneer Overture Services for $1.7 billion.

Yahoo has taken a less financially risky approach in the last year despite its growing profits. It's been systematically examining and buying upstarts in up-and-coming markets. An example is last week's acquisition of voice over Internet Protocol (VoIP) company DialPad. Others have included the photo-tagging site Flickr and e-mail company Oddpost. All the recent acquisitions were so small they didn't significantly impact earnings, so financial terms were not disclosed.

David Filo
David Filo
Co-founder, Yahoo

Yahoo, many analysts believe, is entering a new era as a media company rather than a tech innovator. It's been building a Hollywood headquarters and an entertainment team under newly hired Lloyd Braun, a former ABC executive. Sources say that Semel will spend more of his time there. In Hollywood, the company will be in a better position to strike partnerships, license content and create new original programming.

That's not to say Yahoo is ignoring its own technology, which proponents say gets the short shrift when compared with Google. When Yahoo acquired Overture, it also landed AltaVista, one of the oldest search engines on the Internet, along with Inktomi. Top-notch engineers came with the acquisitions. Yahoo also recently hired Ysama Fayyad, a rocket scientist from NASA's jet propulsion team, to head up its research labs.

"The technical skill that it takes to scale (products) for 400 million users is something Yahoo hasn't been given credit for in the past. It requires rocket science," said Yahoo spokeswoman Joanna Stevens.

Yang also spearheaded an effort to attract top engineering talent. Called Project Guru, the initiative is meant to encourage staff to scout for experts in various fields such as search algorithms and Internet communities.

All about the computer science
Google hired Eric Schmidt, the chief executive at the troubled software company Novell, in 2001 to run the show. But as the prospectus for the company's initial public offering states, Google is run by a triumvirate. Schmidt may be the boss on paper, but he clearly shares authority, industry insiders say.

Eric Schmidt
Eric Schmidt
CEO, Google

Google's $2.5 billion war chest and freedom let employees throw many new services against the wall to see what sticks. But critics question whether Google has an efficient process for managing innovation. The free e-mail service Gmail, for example, is still in beta testing after nearly two years.

"It's like the Wild West at Google. They have enough money and enough disregard for the status quo," said one industry insider who asked to remain anonymous.

When it comes to acquisitions, Google rarely spends big. Often, it acquires upstarts in growth markets that no one saw coming, such as the Stanford search project Kaltix, the advertising technology company Applied Semantics and the blogging software provider Pyra Labs.

Larry Page
Larry Page
Co-founder, Google

The biggest arrow in Google's quiver is its engineers. Google's research and development budget was nearly $80 million in the first three months of 2005, more than twice the previous year, and it continues to attract some of top talent in the country, such as Adam Bosworth, a programming guru who spent years at Microsoft and BEA Systems. Yahoo spent roughly $119 million in a category called product development.

"You won't find any bored engineers at Google," the company's Web site says. "You will find friendly colleagues, fascinating projects and the opportunity to make life better for tens of millions of people every day."

Sergy Brin
Sergy Brin
Co-founder, Google

Google execs seem well aware that they have to continue to innovate to maintain their edge. It's widely expected that Google will unveil a Web browser and possibly a thin-client operating system, and Microsoft will be a formidable competitor when or if this happens. Google is also building a payment system for video consumption, a major deviation from the company's traditional business.

So who wins?
Though Google is bigger, Yahoo appears to have the upper hand when it comes to warm relations with Madison Avenue. After the dot-com bust, Yahoo ate crow and approached marketers with a more humble, bottom-line pitch. Under direction from advertising veteran Wenda Millard, Yahoo's sales team now focuses on traditional partnerships and handholding with ad agencies. Yahoo also runs an internal telemarketing group whose sole responsibility is to call small agencies and companies to work with Yahoo.

In contrast, Google's approach relies on classified advertising that is based on technology rather than relationships.

"Yahoo has a big branded advertising business. Google is all search. To the extent that brand advertisers want to participate in the Internet, Yahoo's a better bet," said Rob Sanderson, a financial analyst at American Technology Research.

"Yahoo hand-holds you everyday. They look to (be) a strategic partner," said Sarah Fey, president of Isobar, one of the largest interactive agencies.

Financial analysts and industry watchers say there's room for both companies in the Internet economy. But they worry that Google, just like Yahoo, will at some point have to go through its awkward years.

"I do believe that Google will hit a wall eventually, and it will hit it spectacularly," said the book author Moore. "The real question is: What will it do then?"

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