Business

Unsung Hero

Canadian Jeff Mallett is the driving force in the success of Yahoo!, the Web’s most popular portal

Andrew Phillips October 2 2000
Business

Unsung Hero

Canadian Jeff Mallett is the driving force in the success of Yahoo!, the Web’s most popular portal

Andrew Phillips October 2 2000

Before he rose to the top of Yahoo! Inc., the online outfit that boasts it intends to become the “preeminent media company of the 21st century,” Jeffrey Mallett played soccer. He played it well—well enough to spend two years in Canada's national program as a teenager—and he played it hard. Though he stands just five-foot-four, Mallett was a striker—in his own words, “the sneaky little guy up front.” Many of the defenders he went up against were six inches taller and 50 lb. heavier.

But, recalls John Hughes, his childhood friend and fellow player back in Victoria, “Jeff never backed down against the big guys.”

Good thing. Yahoo went public 4-1/2 years ago as a gateway to the Internet just as use of the World Wide Web was exploding. Now its very much in the big leagues, a 2,700-employee outfit dealing as an equal with long-established media giants like Walt Disney Co. and Rupert Murdoch’s News Corp. Just as important, in the aftermath of the stock market tech wreck of last April, Yahoo still stands tall. As shaky dot-coms swooned all around it, Wall Street (at least most of it) kept faith in the company as a key survivor of the big Internet shakeout. When it beat market expectations for second-quarter earnings in July, analysts cheered. Mary Meeker of Morgan Stanley Dean Witter, one of the most influential technology trackers, titled a report on the company’s prospects: “Yahoo: the Microsoft of the New Millennium.”

True, not everyone is convinced: market jitters about online advertising have hit Yahoo’s stock hard and sent the company scurrying for other sources of revenue. But Yahoo is already established as a giant of the New Economy, and no one has been more responsible for its survival against the odds than Mallett. The company’s management team has long been legendary in Silicon Valley, where Yahoo operates out of a plain-vanilla headquarters building in Santa Clara, Calif. The story of how a pair of young graduate students, Jerry Yang and David Filo, spent 1994 in a cramped office trailer at Stanford University coming up with the idea for a directory to make sense of the expanding chaos of the Web, is the iconic Internet story. Two guys, an inspired idea, perfect timing, a lot of pizza and late nights—and ultimately billions and billions of dollars.

Less known is how their brainwave was turned into a $91-billion company that provides the most heavily used entry point to the Web and manages to do what almost no other pure Internet operation has achieved: make a profit ($91 million last year). That trick has been turned by a pair of managers who have also achieved wealth—but far less fame. One is Yahoos chairman and CEO, Timothy Koogle, an engineer and onetime rock guitar player known around the company as “T.K.” The other is Mallett, its president and chief operating officer, the diminutive, intense British Columbian whose in-house nickname is “Sparky.” Michael Moritz, the Silicon Valley venture capitalist responsible for financing Yang and Filos start-up and recruiting Mallett as its 10th employee in 1995, says: “Jeff is the unsung hero of Yahoo.”

Unsung, but not unrewarded. At a relatively tender age (he turned 36 on Aug. 7), Mallett is worth roughly $750 million, propelled by Yahoo stock that soared 500 per cent in 1997, almost 600 per cent in 1998, then nearly tripled again last year. Canadian Business ranks him as the 34th-richest Canadian (and the fourth youngest on its list). In its annual survey of the highest-paid executives in Silicon Valley, the San Jose Mercury News placed him second, just behind Cisco Systems Inc. CEO John Chambers, who earned $180 million in 1999. Malletts takings for the year: a cool $ 54 million, almost all from exercising stock options in Yahoo. Among the rewards: a 10-hectare spread, complete with nine-hole golf course, that he and his wife, Claire, bought last year for $13.5 million near her family’s home in the Napa Valley.

Not bad for a guy who wears blue jeans and a casual shirt to work, operates out of a cubicle in Yahoo’s whisper-quiet open-plan offices, and visibly squirms when asked directly about money. Partly it’s basic modesty; partly it’s the company culture. “No one ever talks about it,” he says. “No one ever flaunts it. If you did, we have a neighborhood watch—you’d get thrown out of the neighborhood.” Anyway, “there’s someone in the next cube who’s 10 times better off than I am.” And in fact, it’s true. In the next-door cubicle (a basic eight-by12-foot work space) sits Jerry Yang, the company’s co-founder and self-tided “Chief Yahoo.” His net worth, depending on where the stock is trading that day, hovers around $8 billion.

Together, Yang, Koogle and Mallett form the triumvirate that have charted Yahoo’s rise (Filo, the other, more reclusive co-founder, focuses on the technical side). Yang, still just 31, has just one person reporting directly to him (his executive assistant), but acts as a long-term thinker and the company’s main face to the outside world. Koogle, at 49 the oldest, brings the widest business experience, and, says Mallett, “has lots of patience and thinks things through—the consummate chairman.”

Mallett, by his own account, is the hyperactive get-it-done guy—hence his nickname: “It doesn’t matter if I get off the plane after a 20-hour flight from Asia. I’m always jazzed and ready to go. Jerry’s the thinker and T.K. s the calm, cool one, and I’m—everyone says—the sparky one who’s trying to make it happen. I’m the reality guy, I guess.” Moritz, a partner in the venture capital firm Sequoia Capital, has described Koogle and Mallett as “the glove and the hammer” of Yahoo. Mallett does not disagree: “Some people think I’m soft and cuddly and look like I’m 17 years old. But you bet, if something has to get done, it will get done.”

He discovered a passion for business around the dinner table growing up in Victoria. His parents, Brian and Marilyn, left careers at B.C. Telephone Co. to form a company called IPT Corp. (for Island Pacific Telephone), which they sold to Cable & Wireless PLC of London in 1987. “I’d get to look at profit and loss statements,” says Mallett. “You either like it or you don’t. I found it absolutely fascinating.” After a year studying business (and playing soccer) at the University of Victoria, he spent a year “bumming around” the Pacific, including a stint as a busboy at a hotel in Sydney, Australia. Then a soccer scholarship took him to Santa Rosa Junior College near San Francisco, and eventually to San Francisco State University. He dropped out after two classes in the MBA program (“I was bored”), but helped a professor found a company called Reference Software, which developed the grammar checker Grammatik. After that came a stint running the consumer division of Novell Corp. Once again, he says, “I was kind of bored.” Moritz had met him briefly at Reference Software, and concluded that “Jeff was the only businessman there.” In mid-1995, he was helping Yang and Filo recruit managers for the fledgling Yahoo. Mallett agreed to meet them. What he found was “basically a big idea. There was no revenue, no business plan and less than six weeks of cash. To some people that would be a potent mix for disaster. To me it’s like a dream.”

What Yahoo had going for it was huge pent-up demand and terrific name recognition. Millions were logging onto the Internet for the first time and looking for a way to navigate the Web. Before the company was even founded in March, 1995, Yahoo was getting more than 100,000 hits a day. The catchy name helped. Yang and Filo first called it “Jerry and David’s Guide to the World Wide Web,” then dubbed it Yahoo! in a stroke of marketing genius. (Later, they said it stood for “Yet Another Hierarchical Officious Oracle”—but only because outsiders kept insisting it must mean something.) By the time the company went public in April, 1996, the Internet boom was in full swing. Yahoo stock was offered at $13 (U.S.) a share, opened on the Nasdaq exchange at $25.25, and closed at $33. A year after the company was founded, it was worth the equivalent of about $1.1 billion.

But that story was like dozens of other Internet start-ups: instant riches in a frantic market. What made Yahoo different was that it evolved far beyond its rivals. There were other directories with names like Excite, Lycos and Infoseek. Some were even better for certain searches. But Yahoo kept adding new services: more content like news and weather; free email; personalized home pages; stock quotes; links to shopping and travel sites. It spent lavishly on marketing, with the tag line “Do You Yahoo!?” And it recently made a shrewd switch to the popular, ultra-fast Google search engine for page searches beyond its own directories.

At the same time, it resisted the temptation to merge with a bigger, more established partner even as its rivals were swallowed up by the big players—Infoseek by Disney, Netscape Communications Corp. by America Online Inc. Now, says Mallett, “we're the last free-standing 1995 Internet company.” The company’s leaders insist they intend to keep it that way and remain independent—“a pure Web play.”

How did they do it? In part, says Mallett, by keeping it simple. By not, for example, trying to take on AOL and other Internet providers head on by charging monthly service fees. “It’s very easy to wander far afield,” he says. “But in the beginning, we said we need to do one thing and do it extremely well—connect people with information.” The company also imposed tough financial discipline. The hip marketing style is deceptive. Internally, says Mallett, “were wickedly boring.”

The stroke of luck was timing—coming to market just as demand for the Web was surging. Most of what Yahoo does, even its own people acknowledge, is not unique. It brings together services that many others offer, and information that can be found elsewhere. Instead, says Mallett, “it has to do with brand, image, feeling. We were the first ones to really get out and build a brand.” Just as important, it linked all those services seamlessly together—one sign-on gave a user easy access to the entire Yahoo network.

That network now stretches around the globe, with 156 million unique users and an average of 680 million page views a day in June. It has operations in 24 countries and a dozen languages—with the world outside the United States accounting for more than 40 per cent of users and 15 per cent of revenues (up from nine per cent a year ago). The first non-American sites, in Japan and Canada, opened in 1996. In Toronto, Yahoo! Canada managing director Mark Rubinstein oversees 25 employees (with plans to expand to 60 within a year) and says Yahoo has six million registered Canadian users each month. Rubinstein maintains that makes Yahoo! Canada the country’s “leading online media company,” beating out homegrown rivals such as Canoe and Canada.com.

The trick, of course, is to turn a profit while expanding services and satisfying Wall Street’s demand for ever more growth. Other Internet companies that have fallen short of analysts’ expectations—notably Amazon.com Inc.—have been murdered by the markets this year. Amazon’s stock plunged 54 per cent from its peak. Yahoo is way down, too—55 per cent from its top of $250 a share in early January. But so far, most investors have held on—and most analysts see Yahoo as the bellwether of the Internet sector. If it disappoints, a host of weaker dot-coms could be dragged to their deaths.

The company’s soft underbelly is advertising, which accounts for just over 80 per cent of revenue. Most of Yahoo’s banner ads are from online companies, which pay a fee based on page views. The fear is that weakened Internet companies will slash ad budgets—and devastate Yahoo’s bottom line. But in mid-July, the company reported that only 10 per cent of its ad money was coming from “financially questionable” businesses. And it stressed it is expanding other sources of revenue. Last week, it ended a high-profile on-screen partnership with Amazon.com, signing a lucrative new deal with rival bookseller Barnesandnoble.com. It is making a major push into wireless communications—services tailored to the new generation of-Web-enabled cellphones and hand-held computers under the rubric Yahoo! Everywhere. It is launching so-called rich media services—audio and video designed to be accessed through high-speed connections, including a financial channel now and, probably, a shopping channel by year’s end. And it’s looking for a bigger cut from retail transactions that go through its Web site.

There’s no shortage of skeptics. In late August, a critical report by analyst Holly Becker at Lehman Brothers in New York City sent Yahoo’s stock plunging nine per cent in a single day— a reflection of the market’s hair-trigger response to anything negative in the dot-com world. Online advertising continues to erode, she said, and “it’s only a matter of time before we see the impact on Yahoo’s results.” Other analysts, though, jumped to the company’s defense, saying they expect advertising to rebound later in the year. Even Becker amended her remarks to say that Yahoo’s near-term financial results “are not at risk.”

So what about Yahoo’s bold claim to be building the “preeminent media company” of the new century? Mallett, echoing a tone set by founder Yang, says he is “paranoid” that the great ride could end, that some yet-unknown start-up could develop applications that destroy Yahoo’s competitive edge, or that it might lose a head-to-head battle with a bigger rival, such as Microsoft Corp.’s revitalized MSN network. Still, he insists, the seemingly unstoppable growth of the Internet means the company’s future is almost unlimited: “We’re only big because the Web is going to be so big. And we’re in the middle, providing the tools for businesses that want to take advantage of that and consumers who want to reach them. We’re really the enabler, sitting in the middle, and it’s all going on in between.”

And meanwhile, there’s all that money. Mallett may not like to discuss it, but he acknowledges that “I’m set.” What does that change—aside from letting you buy all the toys you want? “It’s allowed me to be a freer thinker. I mean, I don’t worry about money anymore.” Still, there are worries—among them security for his family (he and Claire have two young daughters), a common fear in an area where so many people have so much wealth. Another downside: being constantly approached by people wanting to make a deal, work an angle: “It can get awkward just talking to people, and they get awkward, too. But I don’t think I’ve changed. I know I haven’t.” For the future, he and his wife have set up a charitable foundation that will operate in both the United States and Canada. One possible area: “Kids and sports—my old interests.”

Canadians sometimes fret that they have missed out on the Internet boom, that Mallett and thousands more have had to leave home to score big in the New Economy. Mallett weighs his words carefully when considering lessons for his native land; he doesn’t want to be seen to be lecturing from afar. But, he says, “Canadians haven’t been the fastest movers we’ve seen in adapting to the Internet, whether it’s through tax breaks or helping to stimulate growth of the Web.” It comes down to a different business culture: “We have a saying here—it’s OK to fail, but fail very quickly. Just try it, oops, this isn’t working, back up, try again. Whereas in Canada it’s more socialist. There’s [a feeling that] nobody’s helping you, so why am I going to take the risk? Everyone’s pointing fingers—and nobody grabs it by the reins. The Internet just said, we’re not waiting for you to figure it out.” Waiting around, clearly, is not something Jeff Mallett is prepared to do.