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Commentary: Yahoo banks on new CEO

Terry Semel, the former co-chairman and co-CEO of Warner Bros., is taking over a company with huge potential but one that is also trapped by its own success.

At Yahoo, Terry Semel, the former co-chairman and co-CEO of Warner Bros., is taking over a company with huge potential but one that is also trapped by its own success.

Its counterpart, America Online, is a powerhouse

See news story:
Semel: The new Yahoo on the block
with some 29 million paying subscribers. Yahoo has 79 million registered users--more than twice as many customers. The problem, of course, is that Yahoo consumers get most things for free.

Unlike AOL, Yahoo has never built a franchise that would enable it to charge for its services, and any attempt to charge for basic subscriptions now would create problems. There are too many other Web search engines, e-mail services, and so on that are free of charge.

Yahoo's huge subscriber base gives it huge potential; many TV or radio stations would be very happy with 79 million viewers or listeners. On the surface, it would look as if Yahoo could make money in both advertising and charging for advanced services. But Internet advertising has collapsed, and when you get to the details of just what those advanced services might be, the picture remains murky.

Yahoo was profitable for a while, based on its original advertising-supported business model. Since then, Internet advertising has decreased dramatically. However, it would be a mistake to expect Internet advertising to go away completely, and we believe it will probably revive in 12 to 18 months, although never to match the expectations of a year ago.

One of the basic flaws with Internet advertising as it has been done so far is that it creates a conflict between the advertiser and the portal site. Yahoo, for instance, designs its site to capture the interest of viewers so they stay on the site, while click-through ads are designed to drag viewers away from what they are doing to the advertiser's site. Other approaches are needed.

For instance, rather than immediately jump to a site, a click might register interest with the advertiser and invite it to send additional information via e-mail, automatically bookmark the advertiser's site, or otherwise respond to viewer's interest in an ad without breaking the flow of the viewer's experience.

Corporate portal
Yahoo could also become a provider of enterprise portal technologies or services. By taking advantage of its experience in consolidating Internet-based information and providing an easy-to-use interface that appeals to a mass audience, Yahoo could provide value to businesses looking to create portals for employees, business partners and customers.

In this vein, Yahoo recently announced a relationship with SAP to provide an Internet portal for SAP consumers. Also, some individuals in businesses do use Yahoo services today. For instance, some business professionals use its instant messaging to communicate internally and with customers. In addition, many business users are familiar with Yahoo as individual consumers of Internet information in their personal lives.

The problem with most enterprise portals is that they are dull. Yahoo can bring an entertaining aspect to enterprise portals that could help improve the interface and make the portals more appealing.

However, bringing together corporate applications and information is much more complex than the integration Yahoo has done to date on the Internet. Yahoo would need to build integrated dashboards that provide employees with access to structured information and functionality in multiple corporate applications. To be successful in this market, Yahoo would need to buy or build other technologies and partner with players that have integration skills.

Diversified business model
In many ways, Yahoo is a microcosm of the Internet. Most consumer services on the Internet such as discussion groups, instant messaging (IM), shopping, employment, and a variety of other information and transactional services are available as Yahoo services.

Each of these provides an opportunity for revenue, but some form of micropayment mechanism for each service would be needed. Although no one has been successful in providing such a payment model, if Yahoo could develop one, potential customers might be willing to pay a nominal fee for Yahoo e-mail, instant messaging, and other high-value services.

The emerging picture of Yahoo's future reveals a diversified business model based on income from numerous sources. The new Yahoo model is most likely to include multiple, complementary sources of revenue. We believe Internet advertising is not dead and will likely remain a major revenue source for Yahoo, albeit in evolving forms.

With the addition of Semel as CEO, we expect moves to beef up the content and entertainment aspects of Yahoo via new services and partnerships with various content providers. Besides drawing more visitors and supporting the advertising fees, the new content and services could provide an opportunity to begin charging consumers for content. Enhancements to online shopping and forays into business services via corporate portals provide other revenue opportunities.

The challenge for Semel will be to bring this diversified set of opportunities together into a unified vision for the company that is appealing to a broad array of people and that can be used to drive internal priorities.

Meta Group analysts Dale Kutnick, David Cearley, Val Sribar and William Zachmann contributed to this report. Visit Metagroup.com for more analysis of key IT and e-business issues.

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