David Filo and Jerry Yang started Yahoo in a trailer on the Stanford University campus, not far from the famous garage where Hewlett-Packard got started. They turned it into the web's most popular search engine on the planet for most of us, and a business that looked like a sure thing until it crashed on the rocks of reality.
Yahoo didn't start out to be a business. Dave Filo says he was trying to find a way to catalog sites he found on what was then the brand new World Wide Web. His friend Jerry Yang says they just wanted to avoid working on their doctoral dissertations.
However it happened, they got together and created "Jerry Yang's Guide to the WWW." They put it on their computers and the network for everyone to see and to use. The idea was to help people find what they wanted on the web.
That was in early 1994. Hardly anyone was on the web then, but those of us who were recommended their site to everybody we knew. We thought it was great. Filo and Yang thought it was fun. At first the site, which looks a lot like it does now, resided on Yang's workstation while the search engine was over on David's. The two computers were named after Sumo wrestlers.
The site drew lots of traffic to the Stanford network. So, pretty soon the site, now named Yahoo, was moved to computers at Netscape Communications. Traffic kept going up.
That was just about the time when it began to dawn on lots of folks that you might be able to make some money from helping people find things on the web. Within a bicycle ride of where Yahoo was set up, Infoseek was getting underway. So was Excite, which was called Architext back then.
Filo and Yang got into the swing of of the dot-com thing and got some venture capital. They went out and found "adult supervision" in the person of Tim Koogle, a slightly older Stanford-trained engineer who'd spent time at companies like Motorola.
Yahoo went public in April 1996. Its stock shot up 154% the first day of trading. It was the start of a wild ride.
Yahoo had a great product and they made some good early decisions about promotion. Within a year, Yahoo was getting more traffic than its top three competitors put together
Dot-com companies rushed to advertise on Yahoo. Old economy advertisers joined in. Yahoo took the money and went off on a buying spree, snapping up companies like GeoCities and talking seriously with other Internet stars like eBay.
The site was great. It loaded fast. The design was simple. It had real human beings off in cubicles someplace categorizing websites. We users loved it.
Even better, and unlike many other dot-coms, the company was profitable. But there were clues that maybe it wouldn't last. One big clue was that the management teams of companies that Yahoo bought didn't stick around for long. You can understand why if you look at what happened to Tom Evans.
Evans was the CEO of GeoCities when Yahoo bought them. He was a media business vet. He ran companies like U. S. News and World Report and The Atlantic Monthly. But Yahoo wanted him to take a position down a couple of notches from the top. Even worse, they didn't want to hear what he knew.
As anybody knows who's ever made money from the advertising business knows, it's incredibly cyclic. The revenues go up and down with the economy and with the fads of the industry. Evans knew that from experience. He warned Jeff Mallett, Yahoo's President, about that and other things.
According to the Wall Street Journal, Mr. Mallett responded by exploding in anger and telling Evans, "You don't get it. You're old media."
Maybe so, but he was also right. And good enough that he didn't have to be condescended to. By the time the chickens of the advertising cycle started coming home to roost, Evans and his knowledge were long gone.
The problem was that there was an inner circle and there was everyone else. It was a bit like the Boston society described by J. C. Bossidy in his famous toast, "Where the Lowells talk to the Cabots; and the Cabots talk only to God."
When management teams get that way, they think they can do no wrong. A quote from Mallett shows how Yahoo insiders saw themselves: "Companies have come to see us as the hub [of the Web]."
Actually they didn't. Even if the Web site maintained about a 65% market share and was the hub of the Web for lots of users, many companies, especially the old-economy ones, saw the world very differently. They had lots of possibilities for placing their ad dollars; and, increasingly, the Net, including Yahoo, didn't look like that good a bet. When the cracks in the foundation started to show, it seemed like it was all at once.
First, in early 2001 there was an earnings warning. Yahoo told investors and the stock market community that it expected revenue between one-hundred-seventy and one-hundred-eighty million dollars in the first quarter of the year. That's just a tad more than half of the three-hundred-twenty million they expected. Ad monies were drying up; and the cyclic character of the industry, that Evans had warned them about, was causing trouble.
To make things worse, the dot-coms that Yahoo had built most of its revenue and profit from, were suffering their own problems. Lots of them were going out of business altogether. Just about all of them saw their unearned funding sources drying up like a puddle on hot asphalt pavement.
In March of 2001, CEO Tim Koogle announced that he was leaving so Yahoo could bring in an outsider to fill his post. The board had approved passing over Jeff Mallett for the CEO position. They were going to search outside for a new president. In the meantime, top execs at profitable non-US subsidiaries raced down the anchor rope.
Only weeks later, on April 17, Yahoo announced that it had hired Terry Semel to be the new CEO. His main claim to fame is that he's run movie studios. I'm not clear how this prepares him for a company in a new industry that offers a service and survives on ad revenue.
He's facing big challenges. Semel is coming into a company where top management was seduced by the dot-com myth and the arrogance that can come with success. He's coming as an outsider to a company that has shown no willingness to listen to outsiders. That will have to change, along with lots of other things.
It's really pretty simple. The business that is Yahoo has got to become as good as the product that is Yahoo. The Yahoo site is the top referring site in just about every country where we measure traffic. They've got that part down. Now they have to change the way they run the business side.
That means changing the organization, the strategy, the compensation plans, the day-to-day execution--everything. It won't be easy and it may be too late.
This feature appeared on 21 May 2001
Note: After this piece was published for the first time, Monday Memo reader Greg Sherwin sent me a copy of the bookmark file with the correct name of the very first version. The name you see here is from that file which probably dates from 1993. Thanks, Greg. Return to article.
