From a New York Times Magazine excerpt of Nicholas Carlson’s upcoming book, Marissa Mayer and the Fight to Save Yahoo:
In many ways, Yahoo’s decline from a $128 billion company to one worth virtually nothing is entirely natural. Yahoo grew into a colossus by solving a problem that no longer exists. And while Yahoo’s products have undeniably improved, and its culture has become more innovative, it’s unlikely that Mayer can reverse an inevitability unless she creates the next iPod. All breakthrough companies, after all, will eventually plateau and then decline. U.S. Steel was the first billion-dollar company in 1901, but it was worth about the same in 1991. Kodak, which once employed nearly 80,000 people, now has a market value below $1 billion. Packard and Hudson ruled the roads for more than 40 years before disappearing. These companies matured and receded over the course of generations, in some cases even a century. Yahoo went through the process in 20 years. In the technology industry, things move fast.
Carlson’s take is pretty brutal, and paints a bleak picture for Yahoo’s prospects as an independent company. (Activist investors are pushing for a merger with AOL.) And it doesn’t seem like Mayer is going to get much more time.
I would argue that Yahoo lost its way early. Yahoo was an amazing, awesome resource when it first appeared, as a directory to cool websites. Arguably, the directory to cool websites. It was hard to find the good stuff on the early web, and Yahoo created a map. Their whole reason for being was to serve as a starting point that sent you elsewhere.
Then came portals. The portal strategy was the opposite of the directory strategy — it was about keeping people on Yahoo’s site, instead of sending them elsewhere. It was lucrative for a while, but ran its course. And it turned out that the web quickly became too large, far too large, for a human-curated directory to map more than a fraction of it. The only way to index the web was algorithmically, as a search engine. And one search engine stood head and shoulders above all others: Google.
Yahoo reportedly had an opportunity to buy Google in 2002 for $5 billion. Yahoo, under the leadership of CEO Terry Semel, declined. And that was the end of Yahoo.1 We all know hindsight is 20/20. There are all sorts of acquisitions that could have been made. But I would argue that acquiring Google in 2002 (if not earlier) was something Yahoo absolutely should have known they needed to do. The portal strategy had played itself out. All they were left with was their original purpose, serving as a starting page for finding what you were looking for on the web.
Buying Google in 2002, at whatever cost, was the only way for Yahoo to return to those roots. Google wasn’t just something shiny and new — it was the best solution to date (even now) to the problem Yahoo was originally created to solve. In a broad sense, buying Google would have been to Yahoo what buying NeXT was to Apple in 1997: an acquisition that returned the parent company to its roots, with superior industry-leading technology and outstanding talent.2
In short, Yahoo’s early 2000s leadership had no understanding whatsoever why Yahoo had gotten popular and profitable in the first place. That serving as the leading homepage for the entire web was important and profitable, and that the only way to maintain that leadership was to acquire Google.
Google, on the other hand, learned an important lesson from Yahoo. The basic gist of portals never really died: Google has gone on to build all sorts of properties like Gmail, Google News, Maps, and Google Plus, all of which are designed to keep users on Google-owned sites. But Google never conflated these things with web search. The google.com home page remains to this day as spartan as when it first appeared, and they fully understand that the point of it is to send users to other sites.
Yahoo’s loss of focus on indexing the web was a mistake in the late ’90s. They had a chance to completely correct that mistake by acquiring Google in the early 00’s. They blew that chance, and it’s been all downhill for them ever since.
You could argue that the mistake wasn’t declining to acquire Google, but rather the earlier decision to hire Semel as CEO and an executive staff with a Hollywood/media company background. Two sides of the same bad coin, I say. ↩︎
Among the many problems with this analogy: Apple and NeXT needed each other. Both companies were deeply adrift in 1996. NeXT had talent and great software, but their prospects were even bleaker than Apple’s. Google, obviously, did not need Yahoo, and in fact was almost certainly better served by staying independent and declining any offers to acquire it. ↩︎