Yahoo! Goes to Hollywood

By TERRY MCCARTHY/SUNNYVALE

TERRY SEMEL WANTED THE DEAL BADLY. FOR months the Yahoo! CEO had watched as the head of his entertainment division, Jim Moloshok, met repeatedly with Mark Burnett, producer of the Survivor series, trying to land the exclusive Internet rights to Burnett's other hit show. Semel knew Burnett was talking to competitors AOL and MSN too. So early last fall the former co-chairman of Warner Bros. made a Hollywood move: he combined a personal plea with a hard sell. When he walked into Burnett's office, Semel didn't waste time with niceties. Burnett recalls, "He said, 'We want to provide valuable content, and we think that your show is the perfect model. We'll invest more money in it, we'll sell advertising, and we'll share in it. We can make it work on the site.'"

Within two hours, they had a deal. Yahoo! would push the show--the second season of The Apprentice--on its home page, show outtakes (repeating "You're fired!" at every opportunity) and even partner to sell ice cream branded to the show. "It was a no-brainer," says Semel. "We will never make shows like The Apprentice, they will never have a [TV] audience as big as Yahoo! Entertainment. It shows the power of combining the two platforms." Unlike many new media promises in recent years, that one worked: Semel got more eyeballs, Burnett got more viewers, and within 24 hours of the first Apprentice episode airing in September, the branded ice cream sold out at all 775 stores around the country.

Yahoo!'s Apprentice victory broke new ground in the awkward relationship between Silicon Valley and Hollywood. Internet companies have long wanted to put entertainment content online, but fear of piracy, illegal downloading and disruption of their revenue model have so far made the studios hold on tightly to their product. Semel, who was brought in to run Yahoo! after 30 years in Hollywood, is determined to change that. In November he hired Lloyd Braun, the former chairman of ABC Entertainment who greenlighted shows like Desperate Housewives and Lost and earlier helped develop The Sopranos for HBO, to head up a new media division in L.A. and spearhead the company's venture into Tinseltown. Next month the Silicon Valley--based Yahoo! will open its media headquarters in Santa Monica, a mere limo commute from Hollywood's major studios.

Not that Semel needs to worry much these days. Yahoo! and other search engines have been on a roll. After years of uncertainty about the business model for Internet companies, online advertising revenues have taken off. Google, the biggest search engine, booked a 118% increase in total 2004 revenue, to $3.2 billion, and Yahoo! has kept pace, jumping 120% to $3.57 billion (thanks in part to acquisitions of Inktomi and Overture). Semel's turnaround story: the once money-losing dotcom has become a thriving real-world business, with 399 million unique users this January and some $840 million in profit last year.

Now Semel, 62, wants to take the next leap, building the mythical bridge between the Internet and the entertainment world by putting Yahoo!'s stamp on everything from music to movies. The ultimate tool: streaming video, which allows websites to deliver content--from movies and TV shows to live news footage, celebrity interview clips and even three-dimensional representations of new cars with simulated test drives. In addition to The Apprentice, Yahoo! already streams regular clips from Entertainment Tonight, and has done a deal to webcast the first episode of Kirstie Alley's Fat Actress later this month. It will also distribute short films by JibJab, the political-satire animation company that gained national attention with its humorous take on the 2004 elections, and has agreed on another cross-promotional deal with Burnett for his newest reality show, The Contender.

Yahoo! is not the only engine searching for the content holy grail. The other major Internet companies--Google, AOL and MSN--all have their own strategies to capture more eyeballs for their sites. AOL (which, like this magazine, is owned by Time Warner) has worked with shows like Big Brother and Who Wants to Be a Millionaire? on advertising cross-promotions and last month announced it was talking to TV production houses about developing its own online content. Microsoft, though slower to embrace Hollywood, is putting its Encarta encyclopedia on its search site. Even Google, which says it is committed to search, last month launched a service allowing users to look up movies, find local screen times and link to reviews.

But Semel may be ideally suited to bringing Silicon Valley and Hollywoodtogether. Soft-spoken and unassuming, Semel, along with fellow former Warner Bros. co- chairman Bob Daly, is credited with helping expand Warner Bros. into a highly profitable business, in part by ratcheting up movie-related merchandising and overseeing hits like ER and Friends on TV and movies like Batman, Chariots of Fire and The Matrix. He carefully maintains the connections he made at Warner, and though he now works out of Yahoo!'s Sunnyvale, Calif., headquarters in Silicon Valley during the week, his home is in Bel Air, where he flies every Friday evening to spend weekends with his family.

Semel's previous effort to put video online didn't fare well. In 2003 Yahoo! offered a service called Platinum, with a mix of ABC News, National Geographic and sports from CBS, for $9.95 a month. Consumer interest was so low that Platinum folded before the year was out. This time, Semel is sticking to an advertising-only model, at least for now. "Our primary business is advertising," he notes. "If we have the largest audience in the world, why won't that be a good business?"

But Apple's iTunes store has shown that it is possible to make money with paid online distribution of content. In fact, Semel bought San Diego--based online music-subscription service Musicmatch last fall for $160 million and will soon launch a new digital music store of his own, possibly by the end of this month.

Will an online movie-distribution business be next? So far, the studios "are terrified of the Internet," says John Battelle, former president of the dotcom bible Industry Standard. The video clips Yahoo! gets from the studios are still largely publicity reels for films about to be released in theaters. But Semel argues that the movie industry must move into the digital age. "We've all learned from the music business that staying still is not a good idea," he says.

Semel hopes his company's presence in Los Angeles will position Yahoo! to get the deals when they start flowing. Housed in the old Metro-Goldwyn-Mayer headquarters, the office has room for some 1,000 people--and by the end of the year Semel plans to move down Yahoo!'s finance, sports, news, health, kids and games sections, along with movies and TV. He believes that consumers will ultimately choose their own entertainment content, with the Internet as their programming tool, but acknowledges that he has no idea exactly how the transition will unfold. "To think there is some clear plan is to ignore how the Internet was built," notes Yahoo!'s chief operating officer, Dan Rosensweig. "The users will decide what they want--and what they don't want they'll delete." In the end, the question is whether Yahoo!'s content aspirations will meet the same fate as Den.com Broadcast.com DreamWorks' Pop.com--pioneers in that space that famously imploded. Naysayers are quick to note that we've heard those visions of grandeur before, but in Yahoo!'s case, Semel is hoping for a Hollywood ending. --With reporting by Laura A. Locke/ San Francisco and Jeffrey Ressner/Los Angeles

With reporting by Laura A. Locke/ San Francisco, Jeffrey Ressner/Los Angeles