How Yahoo sank its promising fortunes
When Yahoo launched in 1994, it quickly became the quintessential guide to the World Wide Web, the first place consumers would go to find information. In fact, it was one of the only guides to what was then a fractured, confusing online landscape. Two decades later, the company’s Internet businesses have been valued at zero as the company struggles to find its relevance.
“It’s like the glossy magazine of years ago that lost its luster, or a TV channel that was great in its prime and didn’t come up with new programming hits,” said Martin Pyykkonen, an analyst with Rosenblatt Securities. “They lost their way in terms of capturing and retaining their advertisers in the early days.”
So where did Yahoo go wrong? Many industry observers say Yahoo didn’t adapt quickly
enough to changes in the market. It adopted the wrong strategy for improving its search ads and lost out on opportunities to buy promising companies, including Google and Facebook. And when Yahoo had a chance to sell itself to Microsoft for about $45 billion in 2008, the Sunnyvale tech company blew that too.
“They should have taken the $45 billion, because today it’s worth zero,” said Nicholas Carlson, author of the book “Marissa Mayer and the Fight to Save Yahoo.”
A crowd of Wall Street analysts have recently put zero or negative valuations on Yahoo’s core business, causing the company to announce a plan last week to separate its advertising and search businesses from its large investment stake in Chinese e-commerce firm Alibaba. The move will presumably raise the core business valuation, though its true value is not yet known. Analysts have long predicted that Yahoo, with more than 1 billion monthly active users, could sell itself to a private equity or media company like News Corp. or Comcast. Yahoo’s chairman has said the tech giant has made no determination yet to sell its core.
Humble beginnings
Before it became a worldwide sensation, Yahoo was known as “Jerry and David’s Guide to the World Wide Web,” named after its founders, Jerry Yang and David Filo, two Stanford students. As the Internet took off, people looked to Yahoo for its curated links as a guide. The links were categorized by topics like technology and computing, a directory for the Internet.
“Yahoo was kind of the place to go to start out on the Web, the first place to look,” said Marc Weber, a curatorial director of the Computer History Museum’s Internet History Program.
That changed in 2000, as more people started using search engines to find things, instead of human-curated directories like Yahoo. The trend hurt the Web portal and boosted competitors like Google. Then, as more consumers shifted toward search engines, so did advertising. Yahoo made efforts to catch up, landing significant acquisitions like ad platform Overture and software company Inktomi. But the company’s strategy for search ads was flawed, according to Carlson’s book.
“You can really trace the failing of Yahoo to one simple mistake,” Carlson said.
Google’s strategy
When Google ordered ads on its search engine, it took into account how often people clicked on them. That allowed any ad to rise up in the results if it were more popular, Carlson said, rather than simply if an advertiser paid more for it. Meanwhile, Yahoo’s ads were ranked solely based on the amount advertisers paid. The Google formula appealed to both advertisers and Internet users, and led Google to land a deal with AOL and other sites.
“That was basically the beginning of the end of Yahoo in search,” Carlson said.
Yahoo might also have changed its fate if its leaders had the foresight to buy promising companies with forward-looking technology.
“If you were to single out a trait pretty consistent in Google and Facebook so far, those two have seen things way ahead of the general market. Yahoo has been overall more reactive,” Pyykkonen said. “It’s about planning and seeing the future.”
For example, Google bought YouTube in a deal worth $1.65 billion in 2006, giving it a large presence in the video ad market.
Facebook fumble?
In 2006, Yahoo tried to buy Facebook for $1 billion, but was unsuccessful, according to sources familiar with the deal. Today, Facebook ads are coveted by advertisers because they can target specific users, especially mobile ones, based on location, gender and interest.
“If you had Facebook and Yahoo together, that would be an unbelievably unstoppable combination,” said a former Yahoo executive who asked not to be named.
In 2012, Yahoo named as CEO Marissa Mayer, a former hotshot Google executive. She was the seventh CEO in 61 months, and when she arrived, almost all the revenue streams were down, Mayer said at a recent Fortune Global Forum event in San Francisco. Mayer decided to invest heavily in mobile, which became a revenue growth area for Yahoo.
“We have built a future,” Mayer said at the event.
Analysts say this was a good, necessary step into mobile, but Yahoo still lags behind competitors like Google and Facebook because it joined the mobile party late.
Analysts say Yahoo’s story is also a cautionary tale for tech companies to know when to sell. When Microsoft offered to buy Yahoo for $45 billion, Yahoo declined the offer because the free-spirited “Yahoos” didn’t want to part with their company, according to Carlson’s book. “Now, for the first time, the two of them were seriously considering selling the thing to a giant corporation, where everyone wore suits,” Carlson wrote.
Since that botched sale, Yahoo’s core business has struggled, despite Mayer’s efforts to turn things around.
Today, Yahoo ranks third in the amount of digital ad revenue it captures in the U.S., behind Google and Facebook, according to research firm eMarketer. Yahoo’s market share has declined from about 7 percent in 2012 — when Mayer started as CEO — to 4 percent of the U.S. digital ad dollars this year, the firm estimates.
Focusing on investors
And while Mayer has plenty of supporters, Carlson believes Yahoo made the wrong choice in selecting Mayer as its CEO. There was a big push to find a CEO who could build the next great product, like a Snapchat, he said, a big challenge considering the large market of apps. To Carlson, he thinks it’s time for Yahoo to sell its core business.
“There comes a stage in a corporation where it shouldn’t be about trying to find growth anymore,” Carlson said. “It’s about paying all the investors who own your company.”
Still, the former Yahoo executive who declined to be named said it’s not a simple answer regarding a sale.
“If the board feels that there is a plan in place to grow the company, then they’re putting their weight behind that,” the former executive said. “The risk is if the company gets worse over the next year, then it’s worth less than a year from now. If it gets better, it’s worth more.”