What's right and wrong at Yahoo

NEW YORK (Fortune) -- Terry Semel is out and co-founder Yang is back in as Yahoo's CEO. But amid all the verbiage there is something too often omitted: Yahoo, to succeed, must be a technology company.

In my opinion this holds true for every media company, including News Corp., (Charts, Fortune 500) Dow Jones (Charts), Viacom (Charts) and Vivendi (as I have said in the past). In the world we're entering, a successful media company must also be a successful technology company, excelling in software. Yahoo (Charts, Fortune 500) lost sight of that.

Yahoo co-founder and new CEO Jerry Yang

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But Yahoo was without question the first new media company of the Internet. It may sound ironic to assert it is not tech-focused enough. It succeeded early at aggregating a uniquely large audience and instilling amazing loyalty in its viewers, readers and users. Your humble columnist, for example, still relies heavily on his MyYahoo page. And my personal e-mail remains Yahoo mail. Yet those two things that draw me back to Yahoo every day are works of software.

Yahoo's main problem, it seems to me, is that under Semel's leadership the fundamental truth that software would be the differentiator was forgotten, or at least played second fiddle. Semel came from Warner Bros. The company may have lots of users on Yahoo mail, for instance, but its technology has not improved.

Semel does understand classic media. He revamped Yahoo's sales organization and corporate structure and took the company successfully out of the doldrums of the dotcom bust, boosting its stock up from around $5 to around $27.50 by Monday, when he resigned as CEO and became the non-executive chairman of the board.

That's not failure. Meanwhile, Semel leaned heavily on what he'd learned in Hollywood and got all excited about Yahoo producing its own content.

But while Yahoo was getting better at selling advertising and trying to create content, other more nimble companies were getting better at using software. Google in search of course is the textbook example, but I would include Facebook for its technology-rich social networking environment, smaller more flexible portals like Netvibes that compete with MyYahoo, Joost for TV distribution over the Web, and many others. All of these, like Yahoo, are companies that aim to offer a free software-infused content product and make their money by selling advertising.

Says Michael Wolf, the longtime media industry consultant at McKinsey and Booz Allen who recently had a stint at MTV: "The real mistake Terry made was he focused on content. Now it's become a place where the best software developers don't want to work. They need developers in order to compete with Google. But basically Terry sent the signal to Silicon Valley that he didn't care about software. He cared about content."

When you have a longtime content expert saying things like that, you know the world has changed. Talking to Wolf crystallized my own thinking, which led to this column.

But in my view the issue for Yahoo isn't only its ability to attract developers to employ, but its ability to appeal to the larger community of people who build software - to somehow get them to view Yahoo as a place where they can make a difference and achieve their own success.

The opening panel at Fortune's upcoming iMeme: The Thinkers of Tech conference is one I will moderate entitled "Platforms for the Next Net." It includes the CEOs of Facebook, Salesforce.com, Linden Lab (which operates Second Life) and Marissa Mayer, a top manager at Google. All of these companies aim to create environments where other companies can find success, which in turn strengthens their own business by increasing traffic and user commitment. We lead off our conference with this challenge because it is so central for Internet success. And Yahoo has not made itself into a platform for others.

But my intention here is not merely to pile on and further revile Yahoo. By many measures, Yahoo remains the most trafficked Internet site worldwide. It has had more viewers over its life than any other site or Web company. Therefore it possesses and continues to accumulate more data about users than anyone.

If, as was said at a media conference I attended last week, the primary goal of media will increasingly be to get the right content and right ads to the right person at the right time, then Yahoo's business prospects should remain bright. But the caveat is this: To achieve that challenging goal of "rightness" will take extraordinarily sophisticated analytical and organizational software. Yahoo is way behind Google (Charts, Fortune 500) in developing such tools.

But the good news for Yahoo is that it still has enormous advantages over all the old media with which it increasingly competes for ad dollars. Old media companies in general still don't realize they need to become software companies that excel in analytics, ad placement and targeting. Yahoo probably can still successfully reset its priorities.