All the right moves?
It's not that Yahoo had no clue. Indeed, it seemed to be making the right moves on the technology front after Semel arrived. It bought search engine Inktomi in late 2002 to bolster its effort to catch Google. The next year, it snapped up Overture, which had come up with the novel idea of placing paid ads on other Web sites. But a year earlier, Google had also seized on that idea as its business model--but with a critical twist: The ads people clicked on more often, not just those for which advertisers paid more, would get higher placement on the page. With that key change and a search engine that produced much more relevant results for users, advertisers got much better returns on ads placed with Google.
Then, on Aug. 19, 2004, Google went public. According to some former Yahoos, that was a turning point for the company's culture as well. Yahoo became a company obsessed with Google rather than one looking to make the next leap on the Net. "Yahoo became super-paranoid," says one former search manager. "We switched from charting our own course to looking over our shoulder."
By the end of 2005, Yahoo realized the search ad operation it created out of Overture was foundering and started a crash program called Panama. But throughout 2006, it kept running into delays.
When Panama finally launched last February, it got some good reviews but struck many as too little, too late. Google not only kept growing at many times the rate of Yahoo, it even launched a deal last April to buy DoubleClick, which if approved would give Google a huge foothold in Yahoo's mainstay, online display ads.
Missed opportunities
Meantime, Yahoo missed one huge opportunity after another. In 2005, it was said to be interested in buying the popular social network MySpace, but lost out to News Corp. In 2006, Google snatched up the hot video-sharing site YouTube, which had quickly grown in popularity even as people within Yahoo were pushing for the company to create much the same kind of service from its large stable of video resources and properties. The same year, Yahoo offered around US$1 billion for another hot social network, Facebook, but was spurned. Last year, Microsoft swooped in with a US$240 million purchase of a small stake that valued Facebook at a stunning US$15 billion.
Yahoo has made some mildly successful Web service acquisitions, such as buying the popular photo-sharing site Flickr; and some promising ones on the advertising side, purchasing ad exchange Right Media and targeted-ad network BlueLithium last year. But none of them halted Yahoo's decline. As profits plummeted last year and executive after executive fled, it was becoming clear that Semel's days were numbered. He stepped down last June, replaced by co-founder Jerry Yang and new president Susan Decker.
Ultimately, what Yahoo missed, says Silicon Valley strategy consultant Sramana Mitra, is "a visceral understanding of how the Web is going to evolve". In particular, the quintessential Web 1.0 company failed to make the transition to Web 2.0, which involves creating services that tap the talents and efforts of users themselves: the volunteer-written encyclopedia Wikipedia, video-sharing sites like YouTube, and even Google, whose very search results are based on algorithms that track the links people make from their Web sites to others.
But despite all the missteps, few people would have imagined that Yahoo would become nothing more than a pawn in the titanic struggle between Google and Microsoft to define and dominate the future of the Internet. Indeed, one former senior executive who knows Yang said at the time he took over as CEO: "This is not a flip for him. He really does want the company back on the right track." But after failing to do that in his first six months at the top, his chance to save the company he co-founded may have passed.
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