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Bartz is betting Yahoo can bring up display revenues and make money leveraging Microsoft’s search engine. Right now that’s more plan than reality.

The day before surgery to replace her left knee, Yahoo Chief Carol A. Bartz animatedly described the procedure. “They cut just above here,” she said, miming the moves of the scalpel, saw and drill. “Then, they just glue it back on.” Everything went well–Bartz stayed awake for it–and now, nearly a month post-op, she compares the feel of her knees. The swollen one with the nasty scar is measurably warmer, she notes, fascinated by the process of deep cuts and recovery. It’s just days after a different surgical procedure–the amputation of Yahoo’s search business, in exchange for a ten-year revenue-sharing deal with Microsoft. This one hasn’t gone as smoothly. Accusing her of selling the future of the company for a mess of pottage, Silicon Valley and Wall Street erupted in a rage, beating down the stock 15% to settle into a trough of $14.50 or so. This on the heels of a spurned $47 billion acquisition offer last year from Steve Ballmer, who now walked away with an agreement worth perhaps one-tenth as much to Yahoo, seemed to scorch whatever goodwill Bartz had built up during her seven-month tenure.

Bartz is angry and unapologetic. “People were hoping to make quick bucks,” she says with contempt, brandishing charts that appear to show how much her deal can earn over the long term. “I’m betting the economy will come back. I know it will. I’m betting online ads will get bigger market share. I’m betting Microsoft will be maniacal about search, and we’ll get a big share of that. I’m betting on getting my margins up. For the background to all of it, I’m betting on getting the audience for Yahoo up.”

That combative optimism is pure Bartz, and it has generally served her well throughout careers at 3M, Sun Microsystems and especially at Autodesk, where she turned a small, one-trick tech outfit into a design-software powerhouse. Yahoo poses formidable and enduring challenges. To convince investors that she hasn’t sold off the best of the $7.2 billion (sales) company, Bartz will have to show rapid improvements to the top and bottom lines. The company’s core asset, Bartz insists, is not search (even though keyword ads represented better than a third of the $65 billion in worldwide Internet advertising last year) but in Yahoo’s ability to reach 500 million-plus people in 30 countries, putting ads in front of them all. That, she says, is the proper focus. Satisfy users and their wallets will follow.

Bartz, 60, took Yahoo out of what will be a very expensive arms race for the Web crawling and query analysis that is 80% to 90% of the cost of search. (A day after the deal Ballmer vowed to spend $1.2 billion or more on search technology next year.) Yahoo kept one valuable aspect of it: the display of the answers. Yahoo engineers are working on a search results page that, instead of today’s almost undifferentiated menu of links, creates an engaging page of informational choices about the search results. The effect is less like a Google page–or one from Microsoft’s Bing–and more like a newspaper with real-time information.

Look up a hotel in Athens, Greece and an overview page will deliver a picture of it, a locator map, ratings of the service, attractions nearby and a list of what’s new in town. There are tabs to other reviews, images and discussions about the hotel. Search for a bank and you get its Web site, the latest company news, including stock price, and a list of nearby branches. Soon to appear after Microsoft takes over search, these pages can accommodate Yahoo display ads along with the sponsored links that are Google’s mainstay.

The new look of search is a year or more off, though, and Bartz needs to get the ad dollars faster than that. Postdeal, Yahoo still keeps sales relationships with the world’s biggest advertisers and control of blended search-and-display ad deals. The idea is to get more search revenue, of course, and to encourage more users to stay longer inside a more valuable service. Yahoo Mail has 98 million users in the U.S. alone, almost three times as much as Microsoft’s Windows Live e-mail and four times as much as Gmail from Google. Yahoo News claims six times as many readers as the four highest-circulation dailies combined. Three million photos a day go onto its Flickr photo service. Two hundred and sixty million ads a month are submitted to Yahoo, and 20 million are manually reviewed for content. Six million are rejected for inappropriate content. Bartz wants to get ad numbers up and kill more of what she calls the tasteless “tits and teeth” ads that drive away viewers.

“If I can get the half a billion viewers to 600 or 700 million by making Yahoo Social better, cricket coverage in India better, a better home page, the advertisers will come to us,” she says. “The job is to increase circulation, make Yahoo the center of people’s online lives.” Raising traffic 20% or more, Yahoo’s deal with Microsoft could yield more revenue than Yahoo now pulls in on search, while cutting costs.

Ignored in all the shouting over the search deal is Yahoo’s revamped home page, where banner ads go up for $1 million a day. The new version lets users customize Yahoo with access to competitors like Facebook, the Wall Street Journal online and Gmail. Those sites pop over the home page, along with a tailored ad; sweep the mouse over your Forbes.com page and maybe a bank ad pops up. If you like cooking site Epicurious.com, you might get a pitch from Target, with revenue going to Yahoo, not the content creator.

Coming next will be more personalized choices and tailored advertisements than anywhere else on the Web. Search Yahoo for information on a Toyota Prius, then head over to Yahoo Sports and you’ll see a Prius ad. A brand campaign planned for the fall aims to build audience in areas like Internet video and Web access on mobile devices, as well as traditional Yahoo sites. Every user’s every move within the Yahoo kingdom will eventually be monitored from new data centers in cities like Lockport, N.Y. and La Vista, Nebr. Like Amazon and Netflix, Yahoo will suggest things to read, watch and share with friends, and try to proposition the user with ads likely to spark the greatest chance of engagement.

In one experiment, Yahoo tested the behavior of 1.5 million registered users who also shopped in department stores. By controlling the display and frequency of ads, it learned it could lift in-store, not just online, purchases by as much as 90% with some customers, particularly those over 40.

Geographically targeted ads sent by e-mail, Yahoo found, have response rates five to ten times as high as generic ads. Its deal to sell advertising alongside a consortium of 800-plus U.S. newspapers gives Yahoo a sales force that can target businesses by zip code; along with a separate agreement to use AT&T’s Yellow Pages sales group, this is another 13,000 salespeople. Plans for new sites like high school sports (game schedules, player profiles, even college recruitment news) provide more content for ads.

Ad production software will eventually cut the steps necessary to design and release display advertising, so that the entire process takes a day, not weeks. Yahoo says such efficiencies could drive out of business many of the 400 or so small advertising networks, paid small amounts by advertisers for sales leads generated when users take an action, like visiting an advertiser’s site, buying something, signing up for a newsletter or turning over their e-mail address. That would leave Yahoo to compete head-on with bigger rivals like a reconstituted AOL and Google (via DoubleClick), which are looking at better ad-buying automation, too.

Bartz is spoiling for the contest. “Ah, Schmidt,” she says dismissively, referring to Eric Schmidt, the Google boss alongside whom she worked for nine years at Sun Microsystems. “He really does believe the world is all formulas; we think it’s a little more complex than that.” Not satisfied, she adds, “I am much more of an operations person than he is.”

Blunter, too. Her first meeting with Yahoo’s board began with a technical question about company business. “No f—— way I can answer that,” she said, according to Chairman Roy Bostock. “I just got here.”

At age 8 Bartz lost her mother and, after her father was unable to care for her and her brother, moved to her grandmother’s farm near Alma, Wis. She recalls screaming after finding a snake in the rafters. “My grandmother grabbed the snake, tossed it on the ground and cut off its head with a shovel,” Bartz recalls. “Then she said to me and my brother, ‘You didn’t need me to do that,’ and walked off.” Grandma’s performance review stuck. Bartz was a cheerleader and homecoming queen in high school; she also worked in hairnets for food service and fishnets as a cocktail waitress through college. Graduating from the University of Wisconsin at Madison with an honors degree in computer science, Bartz worked in sales at 3M and Digital Equipment Corp., before following a friend to Sun Microsystems in 1983.

At Sun she was tough but won respect in a particularly hard-charging Valley company by, among other things, insisting that people listen to their customers. “She is one of the few people I have worked for who has no problem telling you that you’re full of shit–and afterward, you don’t mind,” says William Coleman, who joined Sun in 1985 and later founded the software company BEA Systems with two other executives who worked for Bartz.

Focusing on the customer, even at the expense of engineering genius, is another Bartz hallmark. “She is good at figuring out what people will buy, why they buy it and what you can do to make them pay more,” says Carl Bass, who has known Bartz since soon after her 1992 arrival as chief executive at Autodesk, which makes software for computer-aided design and manufacturing.

Her first day there Bartz fired the head of sales. Two days later she was diagnosed with breast cancer and went in shortly after for surgery. She worked from her hospital bed, cutting a six-week recovery to four weeks, a decision she now calls wrong. While easing out managers who didn’t go along with her way of doing things, she set up frequent lunches to hear feedback and complaints.

She also redefined Autodesk’s visualization software to include manufacturing, civil engineering, media and architecture. New products kicked up revenue. But a big push into 3-D software took three very uneven years. Bartz fired Bass twice and rehired him twice, finally naming him to succeed her when she stepped down in 2006. By then Autodesk revenue had climbed to $1.5 billion, from $300 million; its share price had jumped tenfold.

A rock from her days at Autodesk, engraved with the word “Believe,” is now by her corner window at her third-floor office in Yahoo’s Sunnyvale, Calif. headquarters. (It has 5,000 employees in the Bay Area and 13,000 elsewhere.) The rock has sat there since January, when she replaced cofounder Jerry Yang, whom Bartz met while serving on the board of Cisco Systems. (She initially dodged Yang’s proposals; Chairman Bostock says he sold her hard on the job until she concluded, “This is something I can do.”) Yahoo was disorganized and demoralized in the wake of the rejected takeover offer by Microsoft at $31 a share. Yang, doing a second tour of duty as chief after years of failed leadership from the likes of Timothy Koogle and Terry Semel, was being squeezed by dissident shareholder Carl Icahn to find a replacement.

Besides the rock, Bartz brought a passion for discipline and analysis to her office. In her first two months she held tête-à-têtes with executives and engineers, trying to make a single company out of many fiefdoms. Yahoo has perhaps a million computers, connected by fiber-optic cable working at 115 gigabits per second in data centers around the world. It blocks tens of billions of attempted spams every day. It has engineers, designers, ad sellers and editors in 20 countries and content in 30 languages.

There have been some simplifications. Bartz is shrinking Yahoo’s 11 different enterprise resource software programs down to 2 or 3. There is now but one design component needed to summon the home page, instead of 33. Bartz hopes to reduce from 400 to one the number of codes used companywide (local engineers will be allowed to tinker on the margin to suit their markets).

“The idea is that we’re all in this together–ads, content, technology,” says Hilary Schneider, head of North American sales and one of a new Bartz-culled triumvirate, along with Aristotle (Ari) Balogh, chief technical officer, and Elisa Steele, chief marketing officer. Every big product change requires input from all groups. “The way Carol has built this, we can’t succeed individually,” says Steel, before Schneider cuts in, saying, “Production, engineering and business development have to happen together.” Adds Balogh, “There were silos before; now there is a ‘Ready, fire, fire, fire’ approach.”

Bartz’s job approximates that of trying to change a couple of tires on a car going 75mph. She’s got to get the remake of Yahoo right and in a hurry. Her early corporate cleaning bought her some sympathy and, perhaps, a quarter or two of hassle-free work. That has been clipped by the Microsoft deal, and no one knows how far the patience of prickly board member Carl Icahn, who holds 5.4% of the company, can be stretched. “Icahn is just another shareholder,” says Bartz with typical insouciance. “What’s he going to do, fire me?”

Searching for a Win
Bartz is betting Yahoo can bring up display revenues and make money leveraging Microsoft’s search engine. Right now that’s more plan than reality.