Dead End: Yahoo!

Abstract

Yahoo! closed at $118.75 a share in January 2000, a market capitalisation above $125 billion, and sold its core internet business to Verizon in 2017 for $4.48 billion. In between it turned down $44.6 billion from Microsoft in 2008, offered $3 billion for Google in 2002 and walked when Google asked $5 billion, and lost Facebook in 2006 by cutting its own $1 billion offer to $850 million. No single decision explains the collapse. What explains it is seventeen years in which Yahoo! was a directory, a portal, a media company, a technology company and a suite of mobile apps, and was never allowed to finish being any of them. Its most profitable act was buying 40% of Alibaba in 2005, an investment in someone else’s business that eventually outweighed everything Yahoo! built.

The Web’s First Guide

Jerry Yang and David Filo were Stanford graduate students in electrical engineering when they began keeping a categorised list of websites in 1994. The list became a directory, “Jerry and David’s Guide to the World Wide Web”, renamed Yahoo!, backronymed to “Yet Another Hierarchical Officious Oracle” after the fact.

The directory was curated by people. Editors visited sites and filed them under headings, which made Yahoo! a library with a front desk. Google’s later approach was the opposite: infer importance from what pages linked to each other, with no editor in the loop. In 1995 the library was the better product, because the web was small enough to catalogue and users wanted somewhere to start rather than a query box.

When Netscape shipped its browser, the Directory button in the menu bar pointed at Yahoo!, which is how a student side project acquired a hundred thousand visitors a day. Sequoia Capital invested $2 million in April 1995. Yahoo! went public on 12 April 1996 at $13 a share and closed the first day at $33. Revenue from banner advertising reached about $70 million in 1997.

The Portal Apex

The portal strategy was to give users no reason to leave. Yahoo! Mail came from the acquisition of Four11 in 1997; then Finance, Sports, News, Messenger, Calendar; GeoCities in 1999 for about $3.6 billion, which Yahoo! deleted in 2009 (see Link Rot and the Digital Dark Age); and dozens more. The model was AOL’s walled garden applied to the open web.

Advertising matched it: banners sold by the thousand impressions to large brands, scaling with traffic rather than with intent. At the top of the bubble in January 2000 Yahoo! was worth more than $125 billion and CEO Tim Koogle was among the most admired executives in Silicon Valley.

Myth: Yahoo! turned down the chance to buy Google for $1 million in 1998

No source supports it. The famous $1 million (talked down to $750,000) rejection was Excite’s, in 1999: Vinod Khosla brokered it and Excite CEO George Bell said no. Yahoo!’s documented role in 1998 was the opposite one, with David Filo encouraging Page and Brin to take leave from Stanford and build the company themselves, partly because Yahoo! wanted a healthy field of search engines to license from. Yahoo! then made Google its default search provider on 26 June 2000, introducing its own audience to the brand, and in 2002 did try to buy it, offering $3 billion against Google’s $5 billion asking price. Google’s 2004 IPO valued it at about $23 billion. See Myths and Misconceptions.

The Post-Bubble Identity Crisis

The crash took the advertising revenue with it, and Yahoo!’s market capitalisation fell from over $125 billion to around $10 billion. Koogle was replaced in 2001 by Terry Semel, who had run Warner Bros. Semel’s premise was that Yahoo! was a media company and should behave like one: content, entertainment, brand advertising.

His record is mixed rather than empty. Yahoo! bought Overture Services for $1.63 billion in 2003 to own paid-search technology, dropped Google as its search provider in 2004 for its own engine, and grew revenue from $717 million in 2001 to about $6.4 billion in 2006. But the company was running three strategies at once, as a media property, a technology company and a distribution platform, and it was creditable at all three rather than first at any.

The Facebook episode showed the pattern. In 2006 Yahoo! offered $1 billion for a two-year-old college network. Mark Zuckerberg was willing to consider it. Then Yahoo!’s stock fell on a weak quarter and Semel cut the offer to $850 million, and Zuckerberg walked. Facebook’s 2012 IPO valued it at $104 billion.

Meanwhile Google shipped Gmail on 1 April 2004 with a gigabyte of free storage, against Yahoo! Mail’s 4 megabytes, roughly 250 times as much, and Yahoo!’s answer was slow. By December 2007 comScore put Google at 58.4% of US searches and Yahoo! at 22.9%. Google’s advertising was sold against stated intent; Yahoo!’s was sold against attention. The gap compounded, since more searches meant more data and better ranking, which brought more searches.

The Microsoft Offer

On 1 February 2008 Microsoft offered $31 a share, about $44.6 billion, a 62% premium. Steve Ballmer wanted Yahoo!’s audience because it was the only route to a search advertising business that could compete with Google.

Jerry Yang, back as CEO after Semel resigned in 2007, called it inadequate and the board backed him. Microsoft signalled $33 a share, roughly $47.5 billion, then withdrew in May 2008. Yahoo! shares, around $19 before the bid, were near $10 by the autumn. Carl Icahn ran a proxy fight and settled for board seats. Yang stepped down as CEO in November 2008.

The Bet Behind the Rejection

Yang’s case rested partly on Panama, the rebuilt search advertising platform launched in February 2007. Panama did improve Yahoo!’s monetisation per search. The question was never whether Yahoo! could improve, but whether it could improve faster than Google was extending its lead, and it could not.

The Leadership Carousel

Between Yang and Marissa Mayer came Carol Bartz (January 2009 to September 2011, fired by telephone), Scott Thompson (January to May 2012, out after a fabricated computer science degree turned up in his official biography), and an interim run by board member Ross Levinsohn. Each transition brought a reorganisation, layoffs and a new strategy.

Bartz’s lasting decision was the 2009 search agreement with Microsoft: Bing would power Yahoo! Search in exchange for a share of revenue. It removed a large engineering cost and ended any possibility of Yahoo! competing in search. From then on Yahoo! was a media and display advertising company running on a competitor’s index.

The Mayer Years

Mayer arrived from Google in July 2012 to make Yahoo! a mobile-first consumer company. The apps were genuinely good, Weather in particular, and the plan was to own a set of daily habits: mail, weather, news, sports, finance.

Tumblr, bought in May 2013 for $1.1 billion, was the big bet. It brought a young audience and a culture Yahoo! did not have, and Mayer promised not to “screw it up”. The advertising never fitted: Tumblr’s users were hostile to the display formats Yahoo! sold, and its adult content made brand advertisers uneasy. Yahoo! wrote the acquisition down by $712 million across 2016.

Revenue kept sliding. Google sold intent and Facebook sold demographics; Yahoo!’s display inventory was the commodity in that market, and it lost share in every quarter of the transition to programmatic buying.

Alibaba and the Verizon Sale

In 2005 Yahoo! paid about $1 billion for roughly 40% of Alibaba. When Alibaba went public in 2014 the remaining stake was worth tens of billions, more than Yahoo!’s entire market capitalisation, which meant the market was pricing Yahoo!’s operating business at approximately nothing once the tax liability on the stake was counted. Years of work went into extracting the holding tax-efficiently through spin-offs and reverse mergers, none of which worked.

In July 2016 Yahoo! agreed to sell the core internet business to Verizon for $4.83 billion. Two disclosures then arrived: in September 2016 a 2014 breach affecting 500 million accounts, and in December 2016 a separate 2013 breach initially reported at one billion accounts. Verizon renegotiated the price down by $350 million to $4.48 billion, and the sale closed on 13 June 2017. In October 2017, four months after closing, Yahoo! revised the 2013 figure again: all three billion accounts that existed at the time.

The remainder, holding Alibaba and Yahoo! Japan, renamed itself Altaba. Shareholders approved liquidation in June 2019, a pre-dissolution distribution of $51.50 a share went out that September, the certificate of dissolution was filed on 4 October 2019, and liquidating distributions continued into 2024. The 2005 Alibaba investment returned many times its cost. The business it was supposed to support was sold for less than Google had asked for itself in 2002.

Dead End

Yahoo! was a directory to its founders, a starting page to its users, a display advertising platform to its customers, a media company to Semel, a mobile app portfolio to Mayer. Each description was accurate when it was made, and each one was replaced before it was finished.

The comparison that hurts is not that Google was smarter. It is that Google was one thing. Search ranked pages, advertising was sold against queries, and everything else was measured against those two. Facebook was one thing. Yahoo! had a hundred properties, each with a strategy, and a head office that changed which of them mattered every few years. What died was not a product but the ability to choose one.