Yahoo's Challenge

"All of our E-commerce activity takes place in here," Operations VP Kevin Timmons says. The majority--88%--of the company's $5.2 billion in revenue comes from ads, but the company has an active E-commerce business that it's trying to grow.

Keeping infrastructure costs as low as possible is a top priority. While that's a common theme at any well-run business, Yahoo's commitment to cost control is part of its DNA. And it's reflected in the company's choice of hardware: commodity servers running BSD Unix, along with a smattering of just about every other operating system that Yahoo gained through acquisitions.

But parsimony doesn't mean that Yahoo is willing to accept slow response times and a poor user experience. Yahoo must be available 24-by-7, and it must be fast, says Phu Hoang, senior VP of engineering, who oversees the company's apps. Yet, Yahoo still looks closely at every request for new equipment.

Cost consciousness is a necessary obsession. In a company so dependent on the ability to efficiently scale its computing and network infrastructure, even minor changes to the cost equation multiply into major problems. "We squeeze just about every penny out of every piece of hardware we can," Timmons explains.

Of course, as any business-technology manager who runs a data center knows, sometimes the hardware pushes back. Power consumption and the cost of electricity are a big challenge, says CIO Lars Rabbe, an amiable, unassuming blue-eyed Dane. Instead of going for the fastest processors, the cost of electricity and cooling in data centers is forcing companies like Yahoo to look at lower-power systems, like servers that use new dual-core chips from Intel and AMD, which consume less power and generate less heat. "That changes the whole dynamics of how you manage your data centers," he says.

A conservative estimate for the average annual utility cost for a 100,000-square-foot data center is around $5.9 million, says Edward Koplin, a principal at engineering firm Jack Dale Associates. Based on the square footage of its Santa Clara data center, Yahoo is probably paying close to that for that data center alone. And it has 26 others of various sizes.

Keeping costs in line as it battles the highly automated Google is a priority. It will take new services, features, and marketing to make Yahoo more competitive, enhance its image, change perceptions, and bring in more revenue. But the road back up the mountain contains many potholes and blind curves, things that can quickly change perceptions in the wrong way.

CIO Rabbe, whose first job was at a university data center back in the days of punch cards, knows that how Yahoo handles customer data can be the biggest pitfall of all. "Being responsible for the security of the world's largest Internet company can be pretty daunting," he says, explaining later that "we care deeply about personal information. This is something we really make a big deal out of."

Unfortunately, the governments of both the United States and China, and probably many more, also care deeply about personal information and have considerable interest in Yahoo's data. It's a situation also faced by AOL, MSN, and Google. And when interests of governments and citizens collide, governments usually win--to the detriment of personal privacy and, sometimes, personal liberty.

Yahoo is accused of supplying information to Chinese authorities that led to the 2003 imprisonment of an Internet writer who was charged with subverting state power and sentenced to eight years in prison. While surrendering data to government officials may be a legal requirement, it doesn't dovetail with public assertions that customer privacy is important. And in Yahoo's case, its compliance with Chinese authorities has resulted in the detention of journalists. That pretty much guarantees bad press. It's a no-win situation for Google, Microsoft, and Yahoo, which is why all three have asked the U.S. government to make free speech a free-trade issue. For Yahoo and other major Web sites, free speech has hidden costs.

The situation illustrates the risks Yahoo faces as more users worldwide rely on it for news, information, commerce, communities, and connections to like souls. But it also shows the important role the Web portal plays in the lives of many people--and the importance of the information it gathers on each of those people.

The challenge is for Yahoo to figure out a way to parley that information into more revenue, while maintaining the trust that keeps 425 million visitors returning to the site each month for more than just search.