Yahoo: the tech giant that came very close to conquering the Internet and yet nevertheless
lost it entirely.
The fall of Yahoo has many causes, but it’s mostly about missed opportunities and in this
video we’re gonna look at what is arguably the biggest missed opportunity in the history
of mankind: how Yahoo failed to purchase Google not once, but twice.
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Towards the mid 1990s, the Internet was still an untapped world full of possibilities.
It was becoming clear that there was money to be made, but the specifics of how to do
that were still very much up for debate.
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 it.
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 byproduct of this 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 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 still 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 means
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, and to be fair
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.
Yahoo thought it could become the Internet for its users; it thought it could contain
everything they could possibly need on yahoo.com and this philosophy further relegated the
search-engine aspect of Yahoo to the sidelines.
Of course, even though the Yahoo management did not consider search as important, there
were some people out there who did.
Two 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, they were met with
very surprising criticism.
The Yahoo executives argued that using PageRank would actually hurt Yahoo because people would
find whatever they were looking for too fast and they’d 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 userbase 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: a 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 websites on the Internet.
Eventually that method became unsustainable and Yahoo actually started licensing the Google
search engine from 1998 onwards for $7 million a year even though they had passed on the
offer to outright purchase it just one years 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 approach 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
in non-intrusive text format, almost as if they were part of the results themselves.
To be fair, 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 GoTo had created significantly: to start things off, Google
allowed advertisers to buy ads directly from Google, whereas with Yahoo and all 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 and 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 Yahoo 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 that paid 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 and 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 and after exchanging some numbers
Terry presented them with an offer: $3 billion for the entirety of Google.
By this point, however, Larry and Sergey knew that they were in the driver’s seat; after
all it was Yahoo coming to them, not the other way around, which is why they made a counter-offer:
$5 billion.
That number would change things a lot: you have to remember that in 2002 Yahoo had barely
recovered from the dot-com crash and in fact its market cap was hovering exactly around
$5 billion.
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 and
at the time, after Google, the second best search engine was Inktomi.
Like Yahoo, Inktomi had crashed incredibly hard in the aftermath of the dot-com crash,
which is why Yahoo could buy it for dirt cheap: for just $250 million in 2002, when a year
earlier it was worth $25 billion.
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 expected.
Much of the underlying technology was outdated: Overture’s ads, for example, still had to
be reviewed by a human, compared to the fast automated system AdWords used from the very
start.
It took Yahoo two full years to integrate the vastly different technological foundations
of Overture and Inktomi, 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 and this trend only continued.
Of course, not buying Google was just one of numerous mistakes Yahoo made that eventually
led to their demise, but it is easily the most expensive one.
What Yahoo could’ve acquired for $5 billion in 2003 is now worth over half a trillion,
so suffice to say not buying Google stock was a bad decision.
What would not be a bad decision though is learning about the stock market.
As you might already know, I recently released my second Skillshare course on investing,
which explains in detail how stocks are valued and how they work.
Here’s the good thing though: you can watch both my classes for free right now if you’re
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In any case, I’d like to thank you for watching this video and I really hope you enjoyed it.
You can expect to see my next video two weeks from now, and until then: stay smart.