What Happened to Yahoo?

Yahoo is an enigma.  Once the sugar daddy of the online world it has become the poor relation who makes everybody uncomfortable.  It’s still around, but seems hapless and adrift.  What happened?  Is there a future for Yahoo?

A recent insider account gives some answers, but raises even more questions about Yahoo and where online media is really headed.

Paul Graham’s Version of Why Yahoo Lost

Paul Graham is a true Silicon Valley veteran.  He has developed his own programing language, pioneered spam filters and, as a founder of Y Combinator, is a real hi-tech trend setter.  In 1995, he founded Viaweb, which he sold to Yahoo in 1998 and subsequently joined the company.

He recently wrote an essay on his site which gives his inside account on what happened at Yahoo.  It’s highly instructive, both for what it said and for what it didn’t.

He makes two main points:

1. An Innovators Dilemma

When Graham first arrived at Yahoo, he was surprised that Jerry Yang, one of Yahoo’s co-founders, wasn’t interested in making the site’s ad inventory more efficient.  Although technology Graham had developed would help e-commerce advertisers extract a lot more value, the idea was essentially dead on arrival.

It was only later that Graham realized why.  Advertisers were already overpaying for banner advertising, so Yahoo had no interest in optimizing in order to extract “fair value.”  Why get a good price when you’re already getting a great price?

Banners were big business in those days.  Online media was so small that even the paltry amount of budget that major advertisers like P&G were spending seemed like a windfall.  Internet start-ups, meanwhile, were willing to spend anything in order to gain”eyeballs” and win investors.

Graham had suggested that Yahoo invest in Google, but at the time it appeared that there wasn’t nearly as much money in search as there was in media content.  It was a classic case of a disruptive innovation.  Yahoo didn’t see the sense in taking money from a solidly profitable business to put into an unprofitable one.

2. Lack of a “Hacker Culture”

The issue that Graham speaks most passionately about is the poor programing environment at Yahoo.  From his point of view, they were so obsessed with positioning themselves as a media company (partly because they didn’t want Microsoft to see them as a competitor), that they gave programmers short shrift.

He points out that project managers were called “producers” and areas of the company were called “properties.”  It seems that Yahoo’s management was much more concerned with marketing strategies than building great products (which would make them bad programmers AND bad marketers).

Most of all, he says that they lost their start-up culture way too soon.  While most tech companies eventually get put under adult supervision, the Yahoo guys wanted to be “suits.” This is in stark contrast to what he sees at Google and Facebook, who preserve their hacker culture at all costs.

Hey, But Yahoo Won, Didn’t They?

Although it seems like Yahoo blew a big lead, the truth is that they bested every competitor dating from the time of Graham’s involvement with the company.  Lycos, Altavista, Excite and Go are all distant memories.  MSN only survives because Microsoft is willing to finance it in perpetuity. Yahoo might seem beaten, but only because it is the last man standing.

Moreover, although Mr. Graham insists that Yahoo compares unfavorably with Facebook, the numbers tell a different story.  Last year, at the height of the crises, Yahoo had net income of nearly $600 million on revenues of $6.4 billion, far surpassing Facebook’s zero profits on $700-$800 million in revenues.

Meanwhile, Google, seems to be trying to be more like a media company.  Over the past few years, they have been putting a serious effort to market themselves to ad agencies while gobbling up display advertising assets.

An Industry at War with Itself

Tolstoy wrote, “All happy families are alike; each unhappy family is unhappy in its own way.”  The digital world is a collection of unhappy families, mostly because everybody is confused.  With some many ideas flying around and so much money at stake, who wouldn’t be?

Problems are poorly defined and solutions are untested.  Technologists want to build cool stuff, marketers look to fill consumer needs and finance people want to see a profit.  Who’s right?  Well, companies that lose money on lousy products that nobody wants don’t last very long.  People with different perspectives and varied skill sets need to learn to work together.

Having spent ample time in both digital and traditional media, I find the digital world no less myopic, but far less integrated than established industries.  I would suspect that the companies that will survive are the ones that manage to find a common purpose long after the high growth phase has extinguished itself.

It Ain’t Over Till it’s Over

I’m no Yahoo apologist, nor do I aim to quarrel with Paul Graham’s narrative.  If anything, the Yahoo story shows just how confusing the digital business is.  Yahoo’s business model seemed like a sure thing ten years ago, just as search and social look dominant now.

There is, however, a need for a little perspective.  Back in the 19th Century, railroads dominated the corporate world, but by the beginning of the 20th their customers had overtaken them.  Power alternates between infrastructure and destinations as technology changes.  Value in the supply chain is constantly shifting and usually the money goes to the weakest link.

As I wrote before, the really exciting innovation lies in the crap, not where the customer is well served.  That’s why it always seems like the new companies know something the incumbents don’t.  Becoming successful is one thing, surviving in a competitive marketplace is quite another.

As Google’s revenue growth slows and Facebook struggles to win profits even as it’s audience reaches saturation levels, they would do well to ask themselves not how Yahoo lost, but how they survived the onslaught.

One thing is certain:  It’s too early to be picking winners.

– Greg