Why Yahoo's Decline Started 12 Years Ago (part 1)

As a former employee, I've been asked the same question many times recently, "What happened to Yahoo?". This question is obviously a response to the large number of news stories and blog posts about the exodus of talent from Yahoo! and the future of the company (or lack thereof). I'm definitely not a fan of the bandwagon of Yahoo! bashers, though I can't say that I completely disagree with popular opinion that recent decisions have forced the company into a pretty uncomfortable position. I still have no clue as to what happens from here, but I think I can shed some light on a few of the things that I believe brought Yahoo to this point.

1. Yahoo! IPO on April 12th, 1996

Yahoo has been public for over 12 years now. In comparison, Google has been public for less than 3 and Facebook is of course, still private. The internet has obviously changed a lot in 12 years and Yahoo has had to weather these changes in the public spotlight with Wall St influencing their every move. I'm certain Yahoo's public status aided it through several tough times, but I think it's also really inhibited Yahoo from being able to react quickly and decisively to big threats from competition.

People have asked me about why Yahoo failed in the auctions business (I worked on the team for 2 years) and why Yahoo continues to lag behind Google in search (I worked on search for 1 year). With regards to auctions, eBay has succeeded where Yahoo failed by addressing the key problem of safety. Keeping the eBay marketplace clean requires a HUGE amount of time, effort and resources. Yahoo did not have the ability to put that level of investment into their auctions effort without making huge sacrifices to other businesses that were making reasonable profit at the time. The financial impact would've been significant and it still would've been a risky bet at best.

Similarly, in the search game, algorithmic search is a battle being fought in the background. Look at Google's investment in infrastructure, it absolutely dwarfs what Yahoo spends in Search and likely exceeds Yahoo's entire infrastructure spending as well. Indexing, organizing and analyzing the enormous amount of data on the web is extremely expensive at a very basic level. For Yahoo to compete on an algorithmic basis will require a huge investment and one that would, once again, have a severe impact on the rest of the company. As Jerry indicated in his memo to shareholders today, increasing their search monetization is one way to offset an additional investment in their overall search quality and relevancy efforts.

The reasons above are obviously not the only reasons why Yahoo has failed in those areas to date, but certainly it's easy to see that "winning" would require a huge refocusing of resources from areas that still create some meaningful profit. If Yahoo were a private company, it would still be difficult to make these kind of investment decisions, but there would at least be a choice and one which wouldn't necessarilly result in a hostile takeover if the bottom line was temporariliy affected. Google waiting long beyond when they could have to go public was an incredibly smart decision, as well as the way they structured their stock classes to retain as much decision making power as possible within the company. Perhaps this will allow them to weather the numerous attacks they'll see in the next 10 years from promising young upstart companies like Facebook.

This post has gotten a little long. I'll follow up with additional points in subsequent posts...