In 2000, Yahoo, founded by Jerry Yang and David Filo, reached its peak value of $125 billion dollars. The company opened its doors in 1994, initially operating as a catalog of websites organized into a hierarchy of links. This made the World Wide Web more easily searchable for users. As one of the top pioneering companies forming how people use the Web, the company left a massive imprint on the internet as we know it. Yet, 16 years later, due to lack of innovation in business, the industry titan sold to Verizon for $4.8 billion, a mere fraction of its highest valuation.
When analyzing Yahoo’s fall from glory, Google certainly plays a contributing role. In 1998, Stanford University alumni Larry Page and Sergey Brin launched their company. While still in graduate school, the two began working together on an ambitious project titled “BackRub.” Page “reasoned that the entire Web was loosely based on the premise of citation . . . If he could divine a method to count and qualify each backlink on the Web . . . ‘the Web would become a more valuable place,’” explains media mogul, John Battelle in a Wired article on the beginnings of Google.
How did a research project turn into a trillion-dollar company? Why did it surpass the success of a billion-dollar industry leader within a matter of a few short years?
Where did Yahoo go wrong? Learn the importance of innovation in business.
When Good Opportunities Knock, Open the Door
Yahoo famously passed on buying Google twice. Once in 1998, for only $1 million dollars. Then again in 2002 for $5 billion. An article for Wired states that Terry Semel, former Yahoo CEO said, “Five billion dollars, 7 billion, 10 billion. I don’t know what they’re really worth—and you don’t either.”
Yahoo also failed in buying YouTube due to disagreements regarding a legality clause. Google realized the issue, eliminated the clause, and successfully bought the company.
As Google continued adapting to new technologies, paying serious attention to newcomers in the industry, Yahoo kept making poor business decisions. Especially in regards to the tech opportunities right in front of them. David Kirkpatrick shares in The Facebook Effect, they also tried buying the social networking site in 2006. During last-minute negotiations, Yahoo changed their offer from $1 billion to $850 million. Mark Zuckerberg walked away.
Bad Deals Are Costly
Over time, the company proved excellent at business mistakes and terrible at business deals. For example, “its $3.7 billion purchase of GeoCities, its $5.7 billion splurge for Broadcast.com, the $1.1 billion it dropped on Tumblr, none of which really amounted to much,” shares Dan Tynan for Fast Company. Although Yahoo tried their hand at business innovation, these contributions didn’t add up.
Finally, the last major nail in their coffin came in 2008—a “Hail Mary” chance at profitability for the business model. Microsoft wanted Yahoo for $44.6 billion. They turned the deal down, believing that the answers to increasing their value were just around the corner.
Yet, executives guided the company toward a dead end. In a series of terrible judgments, leaders within the company showed hesitation and fear. It seemed like there was no understanding of how they could save their quickly sinking ship. This was one of the many factors causing the devaluation of the company, forcing them to sell to Verizon for a “bargain” price.
Innovation Means Always Looking Ahead
Although Yahoo has its place in history as a key player in determining the use and functionality of the internet, the tech industry doesn’t save a place for non-innovators.
Google soared past Yahoo through paid search advertising. Initially, the two companies held different philosophies in regard to where paid ads should be placed on the internet. Dan Tynan provides insight in his article for Fast Company: “For the first years of its existence, search results were considered editorial content, not to be sullied or diluted by advertising. By the time Yahoo realized its mistake–and acquired Overture, the company that invented paid search advertising, for $1.6 billion in 2003—Google was already steaming ahead.”
After the Overture takeover, Yahoo spent three years creating a new, built-from-scratch advertising platform. However, in the fast-paced world of tech, slow-moving projects, even those that reflect business innovation, don’t keep companies afloat or profitable.
Sustainable Systems Help Business Models Thrive Well Into the Future
In an article for TechCrunch, former Google employee Mohit Aron describes what it was like working for Google during the early days. He explains how Yahoo created unsustainable systems that didn’t fully address external or internal problems, while Google’s leaders sought longevity in “deploying and developing major new applications.”
Ultimately, Google’s team operated with a growth mindset. They created adaptable systems and moved quickly, whereas Yahoo couldn’t find their footing in a fast-changing industrial landscape. They spent years developing programs, while Google surpassed them through innovation, new methods of generating money through paid traffic, and successfully acquiring companies that enhanced their abilities. These decisions forced Yahoo to step aside so Silicon Valley could crown a new king in tech.
Companies Without Great Leaders Fail
In 2012, Yahoo gave Marissa Mayer, Google employee number 20, a shot at the CEO title. At first, executives and stakeholders felt this decision might provide a solution in getting the business back on its feet. Unfortunately, they were wrong. So much so, a survey conducted by Owler found Mayer to be one of the least effective CEOs in the entire tech industry.
In an article for Forbes, Miguel Heft captured the boiling temperature of the company when Mayer was CEO. When describing an offsite meeting in 2015, Heft says tensions mounted among executives as the head of human resources went over a survey showing a stark decrease in trust and morale among employees. The misalignment of management was blatantly evident: sharp words and blame were loosely thrown across the room. “Forbes spoke with more than a dozen current and former executives . . . most say a confused strategy and mismanagement, specifically from Mayer, has undermined any attempts at a turnaround,” provides the writer.
Mayer wasn’t the right leader to guide Yahoo toward success. But she was only one example of the poor leadership that plagued the company in the years leading to its acquisition. NBC News reports, “Before she was appointed in 2012, the company went through a grand total of five CEOs in as many years.”
With leadership changing less than every 12 months, employees were the ones who suffered most. In an article for Business Insider, former Yahoo team member Jelena Woehr says of those years, “Good news at Yahoo was treated as suspect and likely to change at any minute.”
The Right Work Environment Makes All the Difference
In contrast, there’s not a constant shift in leadership at Google. In the company’s entire history, there have been only three CEOs. Most famously, Eric Schmidt served at Google’s helm from 2001 to 2011. After he left this position, Larry Page stepped in. In 2019, Google announced parent company Alphabet and Google would share the same CEO, Sundar Pichai.
For six years in a row, the company has won Fortune’s “The 100 Best Companies to Work For.” The mindset of its founders largely focuses on creating an environment and culture where happy employees thrive. The Googleplex campus serves the purpose of benefiting those who work there. Free laundry rooms, two swimming pools, 18 cafeterias, seven fitness centers, gardens, nap pods, a bowling alley, art installations—you name it, they’ve got it. In addition, employees are treated with free perks like haircuts, dry cleaning services, massages, and on-site healthcare.
Google also implemented their revolutionary attitude around the structure of work and methods for productivity through its “20 percent time” policy. In the effort to increase creativity and business innovation, company founders Page and Brin deconstructed traditional work processes. Beginning in 2004, they gave employees permission to decide how to spend 20 percent of their time at work. This equates to one full business day. The program experienced huge success. During their 20 percent time, employees generated ideas and worked on Google Maps, Google News, Gmail, and AdSense.
As of 2013, the company put more guidelines on this policy, inciting some backlash in the media. But this hasn’t stopped Google’s innovative process or competitive advantage. In 2019, the company was ranked number one by the Boston Consulting Group’s research for “The Most Innovative Companies 2019,” ending Apple’s 13-year reign. “All of the ten highest-ranking companies . . . use AI, platforms, and ecosystems to enable themselves and others to pursue new products, services, and ways of working,” the report describes.
Why Yahoo Failed and Google Continues Succeeding at Business Innovation
Improvement guides innovation in business. Susan Ward writes for thebalancesmb.com, “Innovation is the process of making a product new or better. It can also be the process of doing some service or action in a new way.” Google did both. In comparison, Yahoo couldn’t get a grasp on how to keep up with the young startup.
Yahoo is a pioneer in creating the internet we use today. They were the first to explore and settle an entirely new landscape. In doing so, they made the Web a place for others to establish themselves. But business innovation failed when other settlers began moving in. They blundered their opportunities, played reactively in a burgeoning industry, and didn’t have the right leaders in place. Thus, they remained a pioneer, rather than one of the top tech companies today.
With an innovative mindset as a young startup, Google’s products and services thrived in this new territory. They took foundational concepts around a user-friendly, searchable internet. Then, in this land of opportunity, the company quickly expanded beyond the perimeters Yahoo established.
So, how did a research project dethrone a billion-dollar company? Through making smart, strategic moves, building flexible, sustainable systems, and having the right leaders in place. That’s why Google is the trillion-dollar business it is today and Yahoo is a relic of the past.