Excuse the heading but that’s how it feels. During the early years of internet in the mid-late 1990’s Yahoo was quite something. Together with Netscape it was the world’s new and hot user-friendly web directory used to access the internet, and it had come to market with a really cool name. To many, Yahoo and Netscape was the iconic entry doors to an entirely new world. The internet.
From a company point of view, the peak of all fame was maybe when Microsoft in 2008 made its $44 billion bid on Yahoo, only to be turned down. The owners of Yahoo believed Yahoo was worth so much more.
Already at that time one could see clear signs however that the Yahoo service as an internet search engine and content provider had seen better days. Microsoft themselves however, although being the market leader through their own Internet Explorer, struggled with search engine content that had become the next step in the search engine business. Microsoft focus was it’s Window suite for PC’s and needed an injection of search engine and content providing businesses to be explored alongside its core Windows business line. Internet Explorer’s world dominance was not its technique or content but rather an outcome of Microsoft distribution power.
Two years after Microsoft’s attempt to buy Yahoo, the company had lost 50% of its value. There was no other strategic buyer available and the core search engine business had become commoditized and increasingly challenging to monetize without exploring and integrating nearby business models. Today, another six years later, the core business of Yahoo is worth – nothing. Success has blinded many companies before Yahoo.
Don’t misunderstand me, to shareholders Yahoo’s market cap today is roughly $30 billion. But consider that Yahoo already back in 2005 made a financial investment in Alibaba and today still own 15% of Alibaba valued at $20 billion. Add to that cash at the bank of $4 billion and the value of the separate Yahoo Japan at $6 billion and Yahoo itself is valued at zero. And maybe that is fair.
In early 1993 a search engine, or rather a graphic web directory, called Mosaic was launched. By most considered as the first graphic search engine ever. Using Microsoft’s API they introduced their Mosaic 1.0 for Windows late in 1993.
In 1994, Stanford University PhD engineering candidates David Filo and Jerry Yang launched Yahoo as their version of a graphic web directory to access information on the internet. The graphics were outstanding, the name was really cool and the world fall in love with Yahoo.
Drop outs from Mosaic launched Netscape Navigator about the same time, very much similar to Yahoo, and Netscape and Yahoo became the main rivals. Using Netscape or Yahoo was like choosing between using Nokia or Ericsson mobile cell phones, for you who remember those. These were the two dominating alternatives, at least for a while until massively disrupted.
Microsoft was the giant already by mid/late 1990’s and had come to decision not to be overrun by startups Yahoo and Netscape. Great effort was dedicated to their own search engine Internet Explorer but most importantly Microsoft included their own search engine into the Microsoft Windows package and made massive gains in market distribution. By 1999 Internet Explorer had become the worlds most used search engine for the web.
Conquering a string of new users by the hour Internet Explorer, Yahoo and Netscape had grow rapidly through the mid/late 1990’s. The market started to become mature however, everyone already had one of the three web browsers and Microsoft’s inclusion of Internet Explorer to the dominating desktop application suite Windows made its extremely challenging to compete.
In 1999 the Netscape founders gave up following multiple legal battles of market dominance misconduct against Microsoft’s distribution power and the company was sold to America Online that tried to keep up with the dominance of Microsoft. Unsuccessful AOL is today marginalized and mostly known for its AOL Instant Message service.
Coming back to Yahoo, which was also massively out-competed by Microsoft’s size and distribution power, the founders remained certain that Yahoo had a place in glory. Maybe the financial wealth build over the successful years up to the dot.com bubble burst blind-folded Yahoo, or maybe there was actually some plan to reengage the very original innovator power that created Yahoo in the first place.
One important sign of the later, i.e. to develop the company beyond merely growing the user base, was Yahoo’s decision in 1999/2000 to first upgrade themselves using Googles search engine but at the same time start develop their own new search engine. That was a first sign of product and business model development since initially launching the graphic web directory service in 1994.
Unfortunately to Yahoo, this new company Google founded in 1998 had other plans themselves. Simplicity and a super-efficient search engine attracted many of the users that had started exploring the internet and now wanted more (efficient search engines). Google grow rapidly both in terms of consumer users but also in terms of business users buying the google search engine technology for their own applications. Google was much more efficient than Altavista and WebCrawler that made users having to wait quite some time while the search engine indexed and presented the results.
Google made a smart decision not to bundle its separate businesses too much but rather offer customers a subtle palette of services. Advertising for example is clearly distinguished from search content, while not hidden away. That appealed to users. Google also sold the search engine technology to third-party users for their own applications and hence earned additional revenue streams and build additional but very much complementary business lines.
With increased wealth Googles started to explore further monetization of its core search engine technology. It is a school book example of expanding the business to nearby and complementary and substantial business lines that has clear synergy potentials. Too many companies either stick to micro-developing their core services only, call it maintenance development, or expand to entirely new business lines that, at best, on the surface appears to have some synergies while it is really a new stand-alone business line with limited cultural, technical or management synergies. One of Google’s smart moves was to acquire the online film distributor YouTube in 2006, massively in need of an efficient and scalable search engine.
Over the years Google has continued to developed its business lines and business model around its core technology of search engines monetizing synergies. For example; Google Adwords, Google Analytics, Google News, Gmail, Google Pictures and Google Translate.
To Yahoo, unfortunately business development has been lacking business logic and consistence. Maybe the stress from competition, e.g. shifting CEO’s as many times as the rest of us is shifting shirts, is to blame? Maybe its pure bad luck or maybe, as mentioned, previous success and financial wealth has blindfolded the leadership. One indication for that is the 2005 $1billon plus Yahoo China investment in Chinese Alibaba. Business logic and operating synergies?
While Netscape gave up and Microsoft maximized synergies from distribution power Yahoo has stand foot with its graphic search engine trying to add customer value through different contents like news (news, sport, beauty, etc.) or like Yahoo Mail. Unfortunately, Yahoo’s choice of business development has been within areas that offers nothing unique and has been massively commoditized. Lately it has to be admitted that signs of innovation can be seen with the 2013 acquisition of blogging site Tumblr, put it seems a bit late.
Coming back to the valuation that value Yahoo to zero, when excluding the 15% shares in Alibaba, the cash on account and the separate Japanese business, maybe the valuation is fair? Why should one use Yahoo today when there are multiple of alternatives doing the exact same thing, with more attractive, deeper and wider content and user experiences? Other companies like Google also grow much faster and with more diversified but synchronized business lines. And great news content providers come in masses. That is really commoditized.
Yahoo was a great brand but somewhere down the road it seems to have lost vision, leadership and maybe most importantly the continues improvement of its business model and maximizing synergies and its uniqueness. Hopefully they find their way back to growth and value creation but uniqueness to customers and synergies within operations are not that easily developed as said.
In a sense Yahoo today looks like many of today’s old-school and (sometimes overly) mature companies fighting for the margins they still have while increasingly focusing on cost cuttings, and divestments of non-core assets instead of developing and expanding their business model and uniqueness. And that is exactly what Yahoo is also doing expecting to launch yet another staff reduction program in relation to is upcoming financial report.
Love to see Yahoo succeed, but maybe the Netscape founders were the real winners deciding to move on to new ventures when they lost innovation leadership to others. Still, Yahoo is a cool name.
Thank you for reading. Please feel free to like, comment, share, tweet, email, etc. Hopefully the Pareto principle, also known as the 80-20 rule, will apply. I.e. 80% agree and 20% will give a constructive challenge.