Yahoo could have been the most valuable company in the world. It was once the most visited website on the internet.
They were worth $128 billion dollars. And in the late ’90s, they had the chance to buy Google for just $1 million. Yahoo said no.
Welcome to the dramatic rise and fall of the original internet empire. So, in this blog, we will study Yahoo’s whole business.
We will analyze Yahoo’s business as a whole. We will explore how it failed and how Google was able to beat it. This case study is essential reading material if you are interested in business.
The Rise of Yahoo
Imagine a world without Google. You want to find something on the internet, but… how?
A directory of sorts, divided into different categories. They then forwarded this list to some other friends, who shared it with their friends, and they shared it with their friends.
And before long, this directory was getting thousands of views.
However, this was never meant to be a business.
Jerry and David had just made this directory for convenience to keep track of their favorite sites all in one place, and they’d called it ‘Jerry and David’s Guide to the World Wide Web.
But then, in 1994, Netscape launched a web browser called Navigator, which loads of people started to use.
And the creators of this browser put a link at the top to David and Jerry’s directory so that people could easily find websites to browse.
This meant that within a few months, their directory was suddenly getting millions of views.
That sounds great, but it actually meant that Jerry and David needed to invest in servers to handle all the traffic.
They also needed to hire people to sort through all the new websites they submitted to their directory.
Thus, David and Jerry realized they had no choice: if they were gonna keep this going, they had to make it a business.
Jerry & David’s Initial Days Decisions
First decision: Naming The Business
They needed a proper name for the business. So they opened up a dictionary to try and find a catchy-sounding name to use.
They stumbled across the word Yahoo, defined as an “a boorish, crass, or stupid person.”
They found this amusing and the fun vibe they were going for, so the name was set.
Yahoo officially claims that this stands for Yet Another Hierarchical Officious Oracle – but the truth is that the name Yahoo came first; they just came up with this weird acronym afterward.
Second Decision: Monetizing it
David and Jerry had to figure out how to make money from their directory, which wasn’t that hard.
Yahoo had become the entry point to the internet for most people – after all, the internet was this new confusing thing, and Yahoo was the most user-friendly way to find different websites.
So, as a result of having all this traffic, Yahoo had plenty of companies willing to pay them to have banner adverts on Yahoo’s site.
But then, the Yahoo team had a crucial realization. Because they could see the data of which categories and websites people were clicking on most in their directory, they were perfectly positioned to build products and services people wanted.
Rather than just link people to other services, they could build their services.
And that way,
- They could get even more page views.
- Which meant even more money from advertisers.
For example, they could see many people were clicking on chatroom websites, so Yahoo built their chat rooms and linked to those instead.
They soon launched their services for
- File sharing
- Finance, and lots more
Because they could see these were the things users clicked on most often.
Third Decision: Building a Team
Of course, a company with a traditional organizational structure would never have been able to build and maintain all those different products.
So instead, Yahoo hired as many people as possible and grouped them into different product teams.
And each team had a leader that acted like a CEO.
In other words, Yahoo was like a collection of different start-ups, each focused on a different internet product.
By the year 2000, Yahoo had four hundred different products and services. You could use the Internet all day and never leave Yahoo’s website.
They had created their products and services to satisfy most of the things their users wanted to see.
As a result, Yahoo’s original service, its directory, accounted for less than 20 percent of the site’s total page views.
Over 80 percent of traffic to Yahoo was going to all these other things they developed.
In other words, “Yahoo was no longer just the directory for the internet; it was the internet.”
Everything you needed all in one place. Yahoo had only been started in 1994 by two friends in their college dorm room. Yet, just 6 years later, it had a market cap of $128 billion dollars, making it the largest internet company in the world.
And one of the fastest-growing companies in history.
The Fall of Yahoo: How Google Destroyed Yahoo!
But, during Yahoo’s rapid rise, two students with their startup had come to Yahoo and offered to sell their business for one million dollars, which was virtually nothing for a giant company like Yahoo.
But Yahoo declined the offer. Unfortunately for them, that little company they turned down was called Google.
And that decision not to buy them was about to change everything.
When the dot com bubble burst and the stock prices of internet companies came crashing down, Yahoo was hit hard – investors lost confidence in them, and many of Yahoo’s biggest advertisers either reduced their ad spending or went bankrupt.
Worse still, because there were now so many different sites on the internet, having a single directory that had to be manually updated just wasn’t efficient anymore – and Google had created a much better system to help people find things faster.
As a result, Yahoo realized lots of their users were now going to Google instead of Yahoo’s directory.
Yahoo Destroyed Itself
So, just a couple of years after rejecting the chance to buy Google’s entire company, “Yahoo went to Google to make a licensing deal, where they could integrate Google search into Yahoo’s website.”
The idea was that this way, people would still come to Yahoo’s homepage instead of going straight to Google.
And in the short term, this made sense. In the long term, this was another disaster.
Yahoo users loved Google search, and having it on Yahoo’s site gave it free advertising.
Not just that, but Google had introduced ads in search results, using a clever algorithm to match suitable ads to the correct search terms.
- Google’s ads were more relevant for users.
- More cost-effective for advertisers
- More profitable for Google.
And Google then reinvested those profits into doing deals with other big internet companies – like becoming the default homepage of the Firefox web browser.
And suddenly, Google was in a uniquely powerful position: its search ads business was so profitable and effective that the more money Google spent on promoting its search engine, the more profits it made on the back end from search ads.
So they had even more money to spend. “Yahoo’s banner ads were much less effective and profitable.”
So Yahoo’s profit margins were much smaller, and advertisers started moving their marketing budgets to Google instead of Yahoo.
In other words, just a few years after Yahoo had passed on the chance to buy Google, Google was now stealing both Yahoo’s users and advertisers rapidly.
Yahoo: Let’s Buy Google Now
Yahoo knew they needed to do something drastic, so they went back to Google and asked how much it would cost to acquire them now. Google said they wanted 1 billion dollars.
And Yahoo eventually agreed to this, but by that point, Google had upped the price to $3 billion and then $5 billion.
The deal just wasn’t going to happen. After this, Yahoo completely removed Google from its site and built its own search engine to compete directly.
But it quickly became clear: Yahoo had already lost the search war. And its directory was becoming less valuable by the day.
Not to Acquire Facebook
So, if Yahoo wanted to maintain its dominance, it needed to focus on its other services. And one ample opportunity for Yahoo to do that came in 2006.
Yahoo executives sat down for a meeting with the Facebook founder, Mark Zuckerberg, and a deal was agreed upon for Yahoo to buy Facebook for 1 billion dollars.
Zuckerberg didn’t want to do the deal, but his board of directors and investors told him that if Yahoo offered 1 billion, he had to take it.
However, at the very last minute, Yahoo tried to lowball Facebook and said they could only offer $850 million dollars instead.
This negotiation tactic backfired massively.
Zuckerberg left the meeting feeling delighted – his board had told him, “If they offered 1 billion, he had to take it.”
But Yahoo had offered less, so Zuckerberg turned Yahoo’s offer down, and he got to keep running Facebook as an independent company.
Once again, for Yahoo, by trying to save a few million dollars, they ended up missing out on a company that is today worth around a trillion dollars.
The craziest part is that Yahoo made hundreds of acquisitions and mergers, including 5.7 billion dollars for a site called Broadcast.com, yet turned down Facebook and Google.
They also missed out on deals for eBay and even YouTube.
Just imagine how different the internet and the entire world might look if Yahoo had bought these companies when they had the chance.
Internal Chaos in Yahoo!
But let’s pause for a moment. It’s straightforward for us to look back at these mistakes with hindsight, but at the time, these were just small companies in a sea of countless other small companies.
It’s also important to note that even if Yahoo had bought Google, Facebook, and eBay – there’s certainly no guarantee they’d have gone on to be so successful.
Because the most crucial reason for Yahoo’s decline wasn’t an external competition, it was the giant mess happening internally.
Not Focusing on one Single Business.
An employee at the company wrote a memo listing all of the problems Yahoo needed to address – this later became known as the Peanut Butter Manifesto because it used the metaphor of spreading peanut butter to describe how Yahoo was spreading its resources way too thin.
The employee wrote how Yahoo was trying to focus on everything and thus focusing on nothing in particular.
The most damning example was that employees were asked to write down the word that first came to mind when they heard a particular company’s name.
- For Google, everyone wrote down the search.
- For PayPal, they wrote payments.
- For eBay, they wrote auctions.
For Yahoo, everyone wrote something different. Nobody inside the company knew what Yahoo was or what it was trying to be.
The memo also pointed out that Yahoo had too many people with overlapping responsibilities.
For example, Yahoo acquired a photo-sharing site called Flickr. Yet, they still had a separate team working on a Yahoo Photos service, which did the same thing.
Treating the company like a group of startups had fueled its growth, but now it was sending the company into chaos.
Yahoo was segregated into all these little independent, disconnected teams rather than being a united company with a cohesive vision.
The products and services used by other code systems had different designs and colors, and most weren’t integrated well.
Yahoo Denied Microsoft’s $44.6 Billion Offer
And yet, despite this giant mess inside Yahoo, in 2008, they were thrown a lifeline.
Microsoft offered to buy Yahoo for over 44 billion dollars. Microsoft felt they needed to join forces or Google would become too powerful.
But Yahoo turned Microsoft’s offer down, saying that it undervalued Yahoo’s potential.
A few months later, Yahoo would regret that decision too, as their share price plummeted further, and the company’s value dropped to 14 billion dollars, less than a third of what Microsoft had offered.
Lack of Direction In Yahoo
One of the biggest reasons for this was Yahoo’s lack of direction and its revolving door of CEOs.
In 2007, Terry Semmel was CEO, and from 2007 to 2009, the founder Jerry Yang took over.
From 2009 to 2011, Carol Bartz, then Scott Thompson, took over and lasted just the first half of 2012 before Marissa Meyer came in during the summer of 2012.
That’s 5 CEO’s in 6 years.
Nobody could agree on who should run Yahoo, and when each new CEO didn’t get fast results, they switched to someone else, which created even more chaos.
Yahoo changed its mission statement at least 24 times, showing that even upper management had no idea what Yahoo’s plan or vision was.
All this turmoil meant Yahoo was very indecisive, and thus they were slow to adapt to the rise of mobile internet.
Internal Rating System Went Wrong
Yahoo’s phone apps were embarrassingly bad compared to rivals. And this meant Yahoo’s most popular services, like Yahoo mail, started losing users – because people switched to using email apps instead of Yahoo’s website.
It also didn’t help that Yahoo introduced an internal rating system for employees – where managers had to rate a certain percentage of their team as ‘exceeding’ their targets and a certain percentage as ‘missing’ their targets.
So, even if the whole team had done well, some people had to get bad ratings.
The idea was it would help weed out the less talented employees and help Yahoo become more efficient.
But in reality, it made employees feel like they were competing against each other and created a cut-throat culture where people would backstab each other rather than collaborate as a team.
Conclusion: Why Yahoo Failed
When Yahoo first launched, its directory solved a genuine problem: it made the early internet much easier to use.
But as soon as the search took over and replaced the need for a directory, Yahoo never really found its purpose.
It was the epitome of Jack of all trades, master of none. Yahoo did loads of things very averagely, but it was no longer the best at anything.
Eventually, all their hundreds of products and services got beaten by better alternatives –
- Yahoo shopping got beat by Amazon.
- Yahoo messenger got beaten by WhatsApp.
- Gmail has overtaken Yahoo mail.
- Yahoo answers by Quora.
All these other companies focused on being the best at one specific thing before expanding into other areas, whereas Yahoo no longer had any clear identity.
At one point, Yahoo indeed was the king of the internet, but through a combination of
- Bad decisions.
- Mediocre products
- Fierce competition
- Poor leadership –
They’d lost it all. In 2017, Verizon bought Yahoo for $4.48 billion dollars, which is less than one-tenth of the price Microsoft had offered them.
But Verizon couldn’t revive Yahoo either, and it was sold again in 2021.
Of course, Yahoo still makes money – in fact, several of their products, like Yahoo mail, still get lots of traffic – but that’s mainly from people who set up their email addresses with them years ago and just haven’t updated to an alternative yet.
Yahoo looks likely to fade away gradually into obscurity without some radical innovation.