Yahoo the tech giant that came very
close to conquering the internet, had several failures. One of the greatest is its failure to buy Google.
Towards the mid-1990s the internet was still an untapped world clear that there was money to be made full of possibilities. Yahoo, at the time was one of the biggest players in the Internet Gold Rush. It wasn't the first, but it had a very solid concept behind its back when the internet was tiny.
The founders of Yahoo had the brilliant idea of organizing all the uncharted websites into a neat human curated directory which would be very convenient to the average user. The Yahoo search engine actually emerged as a by-product of the directory and it was never really the focus. In fact at one point, early in its development the Yahoo design team experimented putting the search box not at the top of the homepage; but at the bottom.
During these early days, Yahoo saw a phenomenal success. It was one of the first companies to embrace banner ads, which were effectively the first big revenue stream coming directly from the internet.
The early banner ads were primitive, but very profitable at first. Companies would literally rent space on the Yahoo homepage like a billboard for $10,000 a month. And, then as the technology improved Yahoo would start charging its advertisers based on impressions or how many times their banner ads were seen by users. But, banner ads had a very dangerous incentive. They encouraged Yahoo to keep its users on its own website for as long as possible.
In a way, banner ads came into conflict with the very purpose of yahoo. After all, it was created to help you find the best website for any given topic which implicitly meant not keeping you on yahoo.com forever. But, when the money started flooding in, banner ads became the new philosophy.
And, Yahoo began expanding its own functionality. It was no longer just a search engine; but, a fully functional web portal. The same sort of decision-making came to dominate Yahoo's competitors as well. In fact, this period of the Internet's history came to be known as the portal Wars vehicle.
The search engine aspect of Yahoo was relegated to the sidelines, even though the Yahoo management did not consider search as important. There were some people out there who did too. PhD candidates at Stanford for example Larry Page and Sergey Brin tried to create a better search engine than the one neglected by Yahoo and they did succeed in 1996.
They developed an algorithm called PageRank that could determine the relative importance of a given web page based on how many other pages linked back to it and how important they were. It was an extremely effective algorithm. In fact, it was too effective when Larry and Sergey tried selling PageRank to Yahoo in 1997 for just 1 million dollars. They were met with very surprising criticism.
The Yahoo executives argued that page rank would actually hurt Yahoo because people would find whatever they were looking for too fast and they see fewer banner ads in the process reducing Yahoo's revenue without a buyout offer. Larry and Sergey were left with no choice. They had to drop out of Stanford to develop their own search engine Google over the next two years. While Google was refining its product and rapidly gaining a loyal user base due to its high quality, Yahoo and the other portals were basically stuck in time.
They did make millions of dollars from banner ads. But, most of what they earned was spent on generating content for their portals section with games for kids, a place to book tickets for traveling a job board and numerous shopping sites.
Yahoo was indeed becoming the Internet for some people. But, it was also neglecting its directory, which was still being curated by actual people even despite the exponentially increasing number of web sites on the Internet. Eventually that method became unsustainable and Yahoo actually started licensing the Google search engine from 1998 onwards for 7 million dollars a year even though they had passed on the offer to outright purchase it just one year earlier.
But, while Yahoo was rolling in the banner ad money and didn't care, Google had to innovate or die Google's user. First, approached outright; rejected banner ads. But, instead, it naturally led them to paid search charging advertisers for their ads to appear at the top of search results and non intrusive text format almost as if they were part of the results themselves.
It wasn't Google that came up with this concept. The first paid search program was started by a website called goto.com.
The founders of Yahoo had the brilliant idea of organizing all the uncharted websites into a neat human curated directory which would be very convenient to the average user. The Yahoo search engine actually emerged as a by-product of the directory and it was never really the focus. In fact at one point, early in its development the Yahoo design team experimented putting the search box not at the top of the homepage; but at the bottom.
During these early days, Yahoo saw a phenomenal success. It was one of the first companies to embrace banner ads, which were effectively the first big revenue stream coming directly from the internet.
The early banner ads were primitive, but very profitable at first. Companies would literally rent space on the Yahoo homepage like a billboard for $10,000 a month. And, then as the technology improved Yahoo would start charging its advertisers based on impressions or how many times their banner ads were seen by users. But, banner ads had a very dangerous incentive. They encouraged Yahoo to keep its users on its own website for as long as possible.
In a way, banner ads came into conflict with the very purpose of yahoo. After all, it was created to help you find the best website for any given topic which implicitly meant not keeping you on yahoo.com forever. But, when the money started flooding in, banner ads became the new philosophy.
And, Yahoo began expanding its own functionality. It was no longer just a search engine; but, a fully functional web portal. The same sort of decision-making came to dominate Yahoo's competitors as well. In fact, this period of the Internet's history came to be known as the portal Wars vehicle.
The search engine aspect of Yahoo was relegated to the sidelines, even though the Yahoo management did not consider search as important. There were some people out there who did too. PhD candidates at Stanford for example Larry Page and Sergey Brin tried to create a better search engine than the one neglected by Yahoo and they did succeed in 1996.
They developed an algorithm called PageRank that could determine the relative importance of a given web page based on how many other pages linked back to it and how important they were. It was an extremely effective algorithm. In fact, it was too effective when Larry and Sergey tried selling PageRank to Yahoo in 1997 for just 1 million dollars. They were met with very surprising criticism.
The Yahoo executives argued that page rank would actually hurt Yahoo because people would find whatever they were looking for too fast and they see fewer banner ads in the process reducing Yahoo's revenue without a buyout offer. Larry and Sergey were left with no choice. They had to drop out of Stanford to develop their own search engine Google over the next two years. While Google was refining its product and rapidly gaining a loyal user base due to its high quality, Yahoo and the other portals were basically stuck in time.
Yahoo was indeed becoming the Internet for some people. But, it was also neglecting its directory, which was still being curated by actual people even despite the exponentially increasing number of web sites on the Internet. Eventually that method became unsustainable and Yahoo actually started licensing the Google search engine from 1998 onwards for 7 million dollars a year even though they had passed on the offer to outright purchase it just one year earlier.
But, while Yahoo was rolling in the banner ad money and didn't care, Google had to innovate or die Google's user. First, approached outright; rejected banner ads. But, instead, it naturally led them to paid search charging advertisers for their ads to appear at the top of search results and non intrusive text format almost as if they were part of the results themselves.
It wasn't Google that came up with this concept. The first paid search program was started by a website called goto.com.
But, Google improved on what go-to had created significantly to start things off. Google allowed advertisers to buy ads directly from Google. Whereas, with the other portals you had to go through a sales agent, first Google automated this entire process opening it up to small businesses. In addition to big corporations the program Google created came to be known as Adwords.
It was released in late 2000 just in time for the dot-com crash which killed many of the portals Yahoo was competing with. Yahoo itself survived but it knew it needed to change and to that end, management made a very radical decision. They brought in a CEO with no experience in any tech company. That man Terry Semel had been the CEO of Warner Brothers, which earned him a good reputation in Hollywood but not in Silicon Valley.
He joined the ICO in 2001 and the idea was that he would give a fresh perspective on things which to his credit he actually did. He saw that banner ads were going the way of the dinosaur and the debate search was the future which led him to a very easy conclusion. Yahoo had to get into paid search. There were two ways of doing that. Terry being a practical man went with the easiest one first.
He tried to buy Google in 2002. He opened negotiations with Larry and Sergey. After exchanging some numbers Terry presented them with an offer: three billion dollars for the entirety of Google.
By this point, however, Larry and Sergey knew that they were in the driver's seat. This is why they made a counteroffer: five billion; that number would change things a lot. In 2002, Yahoo had barely recovered from the dot-com crash and in fact its market cap was covering exactly around five billion dollars. In other words, what Larry and Sergey were proposing was not an acquisition, but a merger between equal companies. To a veteran negotiator like Terry, this sounded unacceptable. So, he had to go with his plan B to beat Google at their own game.
It was released in late 2000 just in time for the dot-com crash which killed many of the portals Yahoo was competing with. Yahoo itself survived but it knew it needed to change and to that end, management made a very radical decision. They brought in a CEO with no experience in any tech company. That man Terry Semel had been the CEO of Warner Brothers, which earned him a good reputation in Hollywood but not in Silicon Valley.
He joined the ICO in 2001 and the idea was that he would give a fresh perspective on things which to his credit he actually did. He saw that banner ads were going the way of the dinosaur and the debate search was the future which led him to a very easy conclusion. Yahoo had to get into paid search. There were two ways of doing that. Terry being a practical man went with the easiest one first.
He tried to buy Google in 2002. He opened negotiations with Larry and Sergey. After exchanging some numbers Terry presented them with an offer: three billion dollars for the entirety of Google.
By this point, however, Larry and Sergey knew that they were in the driver's seat. This is why they made a counteroffer: five billion; that number would change things a lot. In 2002, Yahoo had barely recovered from the dot-com crash and in fact its market cap was covering exactly around five billion dollars. In other words, what Larry and Sergey were proposing was not an acquisition, but a merger between equal companies. To a veteran negotiator like Terry, this sounded unacceptable. So, he had to go with his plan B to beat Google at their own game.
To that end, Terry had to acquire a few things. To start, he needed a new search engine. At the time, after Google, the second-best search engine was Inktomi. Like Yahoo, Inktomi had crashed incredibly hard in the aftermath of dot-com crash which is why Yahoo could buy it for dirt cheap;for just two hundred and fifty million dollars in 2002, when a year earlier it was worth twenty five billion dollars.
With a search engine in hand, Terry then needed an ad platform to monetize it with. So, in 2003, he purchased the original paid search platform goto.com, which by then had been renamed to Overture. Now, Terry had all the pieces of the puzzle and he just needed to combine them. But, that proved much more difficult than he expected. Much of the underlying technology was outdated.
Overtures ads, for example still had to be reviewed by a human compared to the fast automated system AdWords used through the very start. It took Yahoo about four years to integrate both of the different technological foundations of Overture Inc.But, by that point they were already too late.
With a search engine in hand, Terry then needed an ad platform to monetize it with. So, in 2003, he purchased the original paid search platform goto.com, which by then had been renamed to Overture. Now, Terry had all the pieces of the puzzle and he just needed to combine them. But, that proved much more difficult than he expected. Much of the underlying technology was outdated.
Overtures ads, for example still had to be reviewed by a human compared to the fast automated system AdWords used through the very start. It took Yahoo about four years to integrate both of the different technological foundations of Overture Inc.But, by that point they were already too late.
When Yahoo bought Overture in 2003,they were tied with Google for ad revenue. But, just three years later, Google's revenue was twice as big. This trend only continued. Not buying Google was just one of numerous mistakes Yahoo made. That eventually led to their demise. But, it's easily the most expensive. What Yahoo could have acquired for five billion dollars in 2003 is now worth over half a trillion.Therefore, not buying Google stock was a bad decision.
Comments
Post a Comment