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 90’s, 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.
Imagine a world without Google. You want to find something on the internet but…
how? Well, back in the 90’s before search engines,
the internet was an unorganized mess, which is why two friends at college, Jerry and David, made a
list of all the websites they liked. 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 favourite sites all in one place,
and they’d simply 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.
Which sounds great, but actually it meant that Jerry and David needed to invest in servers so
they could handle all the traffic. They also needed to hire people to sort through all the
new websites people were submitting to their directory. Thus, David and Jerry realised
they had no choice: if they were gonna keep this going, they had to make it a business.
First decision: 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,
which was defined as a “a boorish, crass, or stupid person.” They found this amusing,
and exactly the fun vibe they were going for, so the name was set. Now, Yahoo officially claim
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 afterwards.
Next, David and Jerry had to figure out how to make money from their directory,
which actually wasn’t that hard. Yahoo had became 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 realisation. 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 own services. And that way, they could get even more page views,
which meant even more money from advertisers. For example, they could see a lot of people
were clicking on chatroom websites, so Yahoo built their own chat rooms, and linked to those instead.
They soon launched their own services for shopping, file sharing, games, sports, finance
and lots more - because they could see these were the things users were clicking on most often.
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 totally 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 own products and services to satisfy
most of the things its 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,
and 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.
But, during Yahoo’s rapid rise, two students with their own startup had come to Yahoo,
and offered to sell them 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 lots of
Yahoo’s biggest advertisers either reduced their ad spend or went completely 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 any
more - and Google had created a much better system to help people find things faster. As a result,
Yahoo realised lots of their users were now going to Google instead of Yahoo’s directory.
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 this short-term, this made sense.
In the long-term, this was another disaster. You see, Yahoo users really loved Google search,
and by having it on Yahoo’s site, it was actually giving Google free advertising.
Not just that, but Google had introduced ads in search results, using a clever algorithm to
match the right ads to the right search terms. Which basically meant Google’s ads were more
relevant for users, more cost-effective for advertisers, and 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 very uniquely powerful position: their search ads business was so profitable and effective,
that the more money Google spent on promoting their search engine,
the more profits they made on the back end from search ads, so they had even more money to spend.
In comparison, Yahoo’s banner ads were much less effective and profitable,
so Yahoo’s profit margins were a lot 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
at a rapid speed. Yahoo knew they needed to do something drastic,
and 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 removed Google from its site completely, and built their own search engine
to directly compete. But it quickly became clear: Yahoo had already lost the search war.
And its directory was becoming less useful by the day. So, if Yahoo wanted to maintain
their dominance, they needed to focus their attention on their other services.
And one big opportunity for Yahoo to do that, came in 2006. Yahoo executives sat down for a
meeting with Facebook founder, Mark Zuckerberg, and a deal was agreed for Yahoo to buy Facebook
for 1 billion dollars. Now, Zuckerberg didn’t actually 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 himself 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 literally made hundreds of acquisitions and mergers,
including 5.7 billion dollars for a site called Broadcast.com, and yet they turned
down Facebook and Google. They also 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.
Maybe you’d be watching MagnatesMedia on Yahoo Video right now instead.
But, let’s pause for a moment. It’s very easy 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 really external competition,
it was the giant mess happening internally.
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 their resources way too thin. The employee wrote how
Yahoo were trying to focus on everything, and thus focusing on nothing in particular.
The most damning example of this was that on a company retreat, employees were asked
to to write down the word that first came to mind when they heard a certain company’s name.
For Google, everyone wrote down search. For PayPal, they wrote payments. For eBay,
they wrote auctions. For Yahoo, everyone wrote something totally 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 had acquired a photo-sharing site called Flickr, yet they still had a
totally separate team working on a service called Yahoo Photos which did the same thing.
Basically, 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 different products and services even used different code systems, had different designs
and colours, and most of them weren’t integrated with each other well at all.
And yet, despite this giant mess inside of Yahoo, in 2008, they were thrown a lifeline. Microsoft
offered to buy Yahoo for over 44 billion dollars. Microsoft felt that they needed to
join forces or else Google was going to become too powerful. But Yahoo turned Microsoft’s offer down,
saying that it undervalued Yahoo’s potential. Just a few months later,
Yahoo would come to reget 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.
One of the biggest reasons for this was Yahoo’s lack of direction,
and its revolving door of CEO’s. In 2007, Terry Semmel was CEO, then from 2007 to 2009,
the original founder Jerry Yang took over. From 2009 to 2011, it was 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 just created
even more chaos. It’s reported Yahoo changed their mission statement at least 24 times,
showing that even upper management had no idea what Yahoo’s plan or vision actually was.
All this turmoil meant Yahoo was very indecisive, and thus they were slow
to adapt to the rise of mobile internet. 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 really 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.
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When Yahoo first launched, its directory solved a genuine problem: it made the early
internet much easier to use. But as soon as 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 beat by better alternatives - Yahoo shopping got beat by Amazon. Yahoo
messenger got beaten by whatsapp. Yahoo mail overtaken by gmail. 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 truly
was the king of the internet, but through a combination of bad decisions, indecisiveness,
mediocre products, fierce competition, and 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 yet 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 setup their email address with
them years ago and just haven’t updated to an alternative yet. Without some kind of
radical innovation, Yahoo looks likely to gradually fade away into obscurity.
Which, raises the question: what will be the next big internet empire?
And to me, the answer is Bytedance, the chinese company that owns TikTok. Most people barely know
anything about Bytedance, and yet I believe they could become the biggest threat Google has faced.
Just click here to find out why. I’ll see you there. Cheers.