Silicon Valley was sceptical of Terry Semel when he arrived to turn around Yahoo - almost two years on and his performance has changed their minds, writes Richard Waters

Terry Semel is the antidote to the excesses of the internet era. The quietly spoken, grey-haired former film mogul seemed an unlikely saviour when he arrived at Yahoo nearly two years ago.

"We wondered how this guy was going to make much impact," says one early doubter who has been closely involved in Yahoo from early on.

Wall Street was as puzzled as Silicon Valley. As co-head of the Warner Brothers film studio, Mr Semel might have learnt how to deal with Hollywood's temperamental creative types. But how could he save a shooting star of the internet whose business model seemed irremediably broken?

Among the most puzzled, it seems, was the man himself. "I didn't start with the concept of wanting a job: I never thought I'd work for any company," he says now.

He also had personal reasons for not wading into the troubled online media business: Mr Semel had already burnt his fingers on the internet, losing $2 million (€1.87 million) on a personal investment in an online entertainment company called Digital Entertainment Network.

Less than two years on, though, he has won over many Silicon Valley sceptics. The Yahoo insider credits Mr Semel with a self-deprecating style and the humility to learn from others with more experience of the internet - while displaying the strength of will to rebuild Yahoo around a more resilient business model.

Wall Street, meanwhile, has been indulgent. Revenue - in freefall after the internet advertising business went into retreat - has rebounded on the back of a range of new services, from linking advertisements to internet searches to handling online job recruitment.

Yahoo's stock is virtually unchanged from when Mr Semel arrived. But given how heavily the shares were overvalued at the outset, as well as the broader collapse in media stocks since then, that counts as something of a victory.

Now, though, Mr Semel must prove not just that Yahoo can survive the dotcom bloodbath but that it can turn the internet back into the most exciting growth medium in the media world.

Sitting in Yahoo's self-consciously egalitarian headquarters in Silicon Valley, the unassuming Mr Semel is not about to embrace a new grand vision to replace the one that died with the internet bust. He seems temperamentally averse to the hyperbole that once characterised the dotcom world, recoiling at any suggestion that there is some "killer app" that will propel Yahoo to instant success. "We're not looking for a quick bang, big whiz thing that changes the whole company. We're not looking for one idea that changes the whole basis of Yahoo," he says.

When he arrived, just six years into the company's existence, Yahoo was in disarray: its sole source of revenue, internet advertising, was collapsing. With a strong self-assurance founded on its earlier meteoric success, it was ill-prepared for the challenge. "It was no different from other companies that had been wildly successful on the internet," says Mr Semel. "I guess arrogance comes with overnight success. But circumstances change."

The new boss's first moves came direct from the management textbook. A new management group was quickly assembled, particularly in the troubled advertising sales area. "We changed the whole sales team. We started all over again," Mr Semel says. That involved bringing in executives with experience from other corners of the media business and repairing frayed relationships with customers to whom Yahoo had paid scant attention when times were good. "We had relationships with advertising agencies - they were all bad," Mr Semel says.

While the company's sales approach needed a complete overhaul, other parts of its dotcom culture have remained intact. "I kept most of the culture because I liked it a lot," Mr Semel says. "It was refreshing: a very open culture, a more casual culture - and yet as competitive as anything I've ever seen."

He has now set down a number of rules to keep Yahoo on track. One is not to take on too much at once. "I don't believe in doing too many things at once," he says. That was a mistake of the early internet days: in the land-grab that developed in cyberspace, companies such as Yahoo rushed to stake out as many new markets as possible. Mr Semel's response: "What are the two or three things we really want to do?"

All new business proposals are put before a new product committee, whose job it is to sort out the competing ideas.

The limiting factor is not one of capital, says Ms Sue Decker, chief financial officer: it is management attention. With its high-fixed costs, the economics of the internet mean that any new service can quickly achieve considerable operating leverage. Incremental revenues fall quickly to the bottom line. But learning how to do a small number of things well in its home market - then exporting that success to other countries - has now become the Yahoo way of doing business.

A second objective has been to focus on services or products that rely on the strengths of the internet as an instant, interactive medium. "We're going to adhere to businesses where the internet has an advantage," Mr Semel says. That means businesses that benefit from the interactivity and broad access that the internet allows.

Yahoo's success since Mr Semel arrived has been to latch on to a handful of promising new ideas. One is known as "sponsored search" - selling targeted advertisements that plug into users' internet searches - a big success in the US last year. Yahoo is now bent on extending sponsored searches to Europe, where the idea is still in its infancy.

To cement its position in the search business, Mr Semel has also snapped up Inktomi, an ailing internet company whose search technology is considered the equal of Google, the current hot property in the search business.

Mr Semel's second big idea revolves around classified advertising. "We looked at what works best on the internet: simply put, it was the world of classifieds," he says. By buying the second biggest online recruitment company in the US and building the second biggest "personals" service from scratch, Yahoo now believes, it has two services that are ripe for export.

This focus on a handful of promising ideas has also meant turning away from other, less successful ventures. That seems likely to mean an end to Yahoo's attempts to build an online auction business to rival the dominant eBay. "It's a nice little business. But we can spend that time to provide better services and be more successful by being one of the best at something," says Mr Semel.

Yahoo's measured steps stand in stark contrast to the traumas at arch-rival American Online, where a grandiose attempt to marry the media and entertainment "content" of Time Warner with the biggest internet distribution platform has left the company in disarray.

For his part, Mr Semel has initiated an online music service but otherwise seems generally happy to bide his time, waiting for the right moment to plunge deeply into online entertainment. The job of "monetising" Yahoo's vast audience of more than 200 million users around the world, turning casual visitors into paying customers, is one that can be done at a measured pace, it seems.

"We're trying to create a platform and an internal innovation machine to keep trying out new ideas," says Ms Decker. The main thing is to perfect the process: after that, new businesses can be rolled out at a measured pace. "It's a bit like a movie studio," she adds.Maybe Mr Semel's venture into the wilds of the internet has not taken him so far from home after all.