Is Yahoo!'s Business Mcdel Working in 2011?

Is Yahoo!'s Business Mcdel Working  in 2011?

Gareth R. Jones

Texas A&M University

In 2006, Yahoo! was the world's most-visited in­teractive Web portal or entryway into the World Wide Web (WWW). It averaged over 144 million page views per day, earned $2 billion on revenues of $6.4 billion in 2006, and its stock price was around $30 (down from its all time high of $100 before the 2000 dot.com bust led its stock price to plunge in value to $4.40!). By 2010, Yahoo! was still the third most-visited Web portal, despite that both Google and Facebook surpassed it in their numbers of daily page views. Moreover, its share of the search engine market had dramatically plummeted from over 30% to around 12% while Google search in­creased its share to a whopping 65%. The result of these changes was that in 2011, Yahoo!'s stock price averaged around only $15—it had lost over half its value in the last 5 years. What went wrong? Why had Yahoo!'s business model been performing so poorly; why were its strategies not working in the rapidly evolving Internet content provider industry?

Yahoes BeCnnings

The Yahoo! portal has its origins in the Website directory created as a hobby by its two founders, David Filo and Jerry Yang. Filo and Yang, two Ph.D. candidates in electrical engineering at Stanford Uni­versity. They wanted a quick and easy way to re­member and revisit the Websites they had identified as the best and most useful from the hundreds of thousands of sites that were quickly appearing on the WWW in the early-1990s. They soon realized that as the list of their favorite Websites grew lon­ger and longer, the list began to lose its usefulness, as they had to wade through a longer and longer list of URLs (Website addresses) to find the specific

site they wanted. So to reduce their search time Filo and Yang decided to divide their list of Websites into smaller and more manageable categories according to each one's specific content or subject matter, such as sports, business, politics, or culture. In 1994, they published their Website directory online calling it "Jerry's Guide to the WWW" for their friends to use. Soon, hundreds—then thousands—of people located and clicked on their Website because it saved them time and effort to identify the most useful sites—their Website went viral.

As they continued to develop their directory, Filo and Yang found that each of the directory's subject categories were also quickly becoming large and un­wieldy to search, so they further divided them into subcategories. Now, their directory organized Web-sites into a hierarchy, rather than a searchable index of pages, so they renamed their directory "Yahoo!" supposedly short for "Yet Another Hierarchical Of­ficious Oracle," and the Yahoo! search engine was born. However, Filo and Yang insisted they selected the name because they liked the word's general mean­ing as originated by Jonathan Swift in Gulliver's Travels as someone or something that is "rude, unso­phisticated, and uncouth"; their goals was, after all, to continuously improve the site over time. As their directory grew, they realized they could not possibly identify all the best Websites that were appearing in the WWW, so they recruited human volunteers to help them improve, expand, and refine their direc­tory and make it a more useful, laborsaving search device.

By 1994, hundreds of thousands of users were visiting Yahoo! every day; it had quickly become the primary search portal of choice for people surfing the Web to help them find the sites that provided the most useful, interesting and entertaining content.

Copyright 2011 by Gareth R. Jones. This case was prepared by Gareth R. Jones as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Reprinted by permission of Gareth R. Jones. All rights reserved. For the most recent financial results of the company discussed in this case, go to http://finance.yahoo.com, input the company's stock symbol (YAHOO), and download the latest company report from its homepage.

Section B: Corporate Level Strategy Cases

By 1995, Yahoo! recorded over a million "hits" or user visits per day as word kept spreading about the utility of their search engine. The increasing size of their search engine had outgrown the limited host­ing capacity of their Stanford University account so they arranged to borrow server capacity from nearby Netscape, which had developed the first Web browser. Yang and Filo decided to put their graduate studies on hold and turn their attention and skills to work on building Yahoo! into a business.

When they created their directory, Filo and Yang had no idea they had a potential gold mine at their fingertips. They enjoyed surfing the Web and were interested in making it easier for ordinary people to do so as well. But, by 1994, it became clear that they could make major money from their directory if they allowed companies to advertise their products on the site in order to attract more sales. Of course, all along, the Internet had been rapidly expanding, and Filo and Yang realized they had to move quickly to capitalize on Yahoo!'s popularity—in any market there are always several other entrepreneurs who are pursuing a similar idea, and the race is on to become the first to successfully develop a new product and make it a success. Although their search engine was the first of its kind to be up and running, they knew it could be imitated. Indeed, competitive Web-crawling search engine companies like AltaVista that used mathematical algorithms to detect the most relevant Websites had already emerged. At this time, Yahoo!'s advantage was that it was a human-powered search engine where real people did the legwork for ordi­nary Internet surfers, and listed sites handpicked for their usefulness. The new mathematical algo­rithms being developed at this time could not match Yahoo!'s ability to select relevant results for specific user inquiries—however, technology quickly im­proved, and Filo and Yang's human-powered search engine was already on the way to becoming a dino­saur because of the incredible growth of the Internet and WWW that would occur in the next decade.

Nevertheless, as visits to Yahoo!'s hits continued to increase, so did requests by companies to adver­tise on its Web portal, and its advertising revenues rapidly increased, which paid for the rocketing costs of hosting their online directory on computer serv­ers. With a hot new business on their hands, Yang and Filo's business model was to generate revenues by renting advertising space on the rapidly expand­ing Web pages of their search engine. When a user clicked on an ad, this "click impression" became a charge to the advertiser's account, and the greater the number of impressions the greater the advertising fees. As their fledgling company grew and the num­ber of user visits soared, Filo and Yang realized they needed to find new sources of funding to develop a sophisticated IT infrastructure to support their por­tal's growth. Searching for backing from venture cap­italists, they soon struck a deal with Sequoia Capital, a Silicon Valley firm that had supported Apple and Oracle among other high-tech companies. Using the $2 million seed capital to build their company's IT systems, their portal continued to soar in popularity, and in 1996, this success led to Yahoo!'s initial pub­lic stock offering that raised $338 million by selling 2.6 million shares at $13 each, to allow it to fund future growth.

Sequoia Capital understood the problems facing new startups and entrepreneurs and insisted that Filo and Yang, who had no business background, should hire experienced executives to develop Yahoo!'s business model. Sequoia's partners had learned that the skills needed to be a successful manager often diverge from those necessary to develop successful business strategies, especially if entrepreneurs are driven by their technical or scientific background and do not understand the realities of industry com­petition. Filo and Yang hired Tim Koogle, an expe­rienced ex-Motorola executive with an engineering background to be Yahoo!'s new CEO. Filo and Yang became joint co-chairmen of Yahoo! with the title of "Chief Yahoo!".

Developing Yahoo!'s Business Model

Koogle started to build Yahoo!'s business model by focusing on recruiting marketing experts and increasing the company's advertising function to strengthen Yahoo!'s core competences and increase ad revenues to fund the company's further growth. At the same time, Koogle decided revenue growth should be driven by increasing the number of site users, and so the need to continuously improve Yahoo!'s search engine—and find new ways to at­tract visitors—was vital.

Filo and Yang took responsibility for improving the search engine but now hired many experts such

Case 23: Is Yahoo!'s Business Model Working in 2011?                                                                          (C2991

as Srinija Srinivasan or "Ontological Yahoo!" as she became known in the company's early days because of her crucial role in refining and developing the clas­sification system that was the hallmark of Yahoo!'s search engine. She helped Filo and Yang hire hun­dreds more software engineers to broaden and in­crease the reach and usefulness of Yahoo!'s search engine, and to manage its fast-growing IT infrastruc­ture that was being continuously upgraded to handle the tens of millions of daily user requests the com­pany was now receiving. By 1996, Yahoo! listed over 200,000 individual Websites in over 20,000 different categories. Hundreds of companies had signed up with Yahoo! to advertise their products on its portal to reach its millions of users.

Another strategy Koogle developed was to take Yahoo!'s business model and replicate it around the world—to increase global advertising revenue. By the end of 1996, there were 18 Yahoo! portals us­ing 12 languages operating outside the United States. In each country, Yahoo!'s portal and Web directory was customized to the tastes and needs of local users. However, there was considerable overlap between countries in terms of popular global news, poli­tics, media, and entertainment Websites, which also helped Yahoo! to find new attractive Websites and strengthen its U.S. search engine. This, of course, led to the development of new Web pages that helped increasing its advertising revenues.

Yahoo!'s success with its growing global Internet search operations convinced Koogle to craft a new vision and business model for Yahoo!. The company would no longer operate only as a search engine, but would now develop new media and entertainment services to allow it become the dominant global communication, media entertainment, and retail company. Yahoo! would become a portal that could be used to enable anyone to connect with anything or anybody on the Internet.

In the vision its top executives crafted, Yahoo! would not only continue to generate increasing rev­enues from the sale of advertising space on its search engine pages, it would also earn significant revenues from engaging in e-commerce transactions—buying and selling between Internet users—and take a per­centage of the value of each transaction executed using its portal as its fee. Of course, other com­panies such as eBay and Amazon.com were also quickly developing this kind of Website service. In 1998, Yahoo! acquired the Internet shopping por­ tals Viaweb and Yoyodyne to create its new retail-shopping platform, Yahoo! Stores. Its new online services would enable new and existing businesses to quickly create and manage secure online stores to market and sell their products. After launching their store, these merchants were also included in searches on Yahoo! Shopping, one of the increasingly popu­lar shopping portals that provided potential custom­ers with price comparisons of the products in which they are interested, and so helped to determine the online store from which they would purchase.

To build brand awareness and make it the por­tal of choice for all kinds of Internet-based services Yahoo! spent heavily on advertising, using radio and television ads targeted at mainstream America. To make its portal more useful, Koogle pioneered Yahoo rs strategy of expanding the range of content and services of the Internet communication services it provided to its users to make the portal more useful to them. Over the next decade, Yahoo! con­tinuously developed its technology and made many (expensive) acquisitions that allowed users to access services such as e-mail, instant and text messaging, news, stock alerts, personals, and job placement ser­vices. Moreover, it made these services available over a rapidly expanding array of digital and computing devices or channels from desktop PCs to wireless laptops, and eventually to mobile computing devices such as PalmPilots and smartphones.

Yahoo! also began to work with media and en­tertainment content providers to help them build and improve their own online content and ability to work on Yahoo!'s digital platform. This increased the value of Yahoo!'s portal to users who could ac­cess any content or merchants they needed through Yahoo!. Its goal was to become the portal of choice—the place where Internet users would routinely visit to enjoy and complete online transactions.

At the same time, these moves made Yahoo! increasingly valuable to companies anxious to ad­vertise on the Internet to grow their business. Each specific new online service Yahoo! offered allowed advertisers to better target their advertising mes­sage to specific demographic groups, for example, sports fans, teens, game players, or investors. On­line brokers such as E* Trade and Ameritrade started to heavily advertise on Yahoo!'s popular financial pages; similarly, sports magazines, eBay, and Block­buster focused on the best way to spend their ad dollars on its shopping and news pages. Targeted

1C300)                                                                                                        Section B: Corporate Level Strategy Cases

advertising increased the rate at which a user clicks on ads, which translated into more completed on­line transactions, therefore increasing the yield (or return) of online advertising to merchants. (This is something Google understood much better than Yahoo! and the reason why Google is the leader in online advertising today.)

The result of Koogle's new business model and strategies was spectacular. By the end of 1998, the company had SO million unique users, up from 26 million in the prior year; 35 million of these were now registered Yahoo! users who had created e-mail, gaming, and other kinds of accounts with the com­pany. Moreover, 3,800 companies were advertising on Yahoo!'s pages up from 2,600 in 1997, and 700 in 1996. By 1999, 5000 merchants were selling prod­ucts on the Yahoo! Shopping page up from 3,500 in 1998, and the company's revenues had grown from $21.5 million in 1996 to $203 million in 1998!

Build ig a Stronger BLsiress Model: More Content

and Channels

To keep Yahoo!'s profits growing, it was necessary to drive an increasing number of users to its portal, and Koogle's new strategies revolved around making Yahoo! a "megabrand" by "becoming the most use­ful and well-known Web portal on the Internet." His entire focus was to create compelling news, media, shopping, and entertainment content by adding ad­ditional Yahoo! channels, which had more services and features to increase its value to users, and en­courage them to become regular registered users. The ability to attract and retain customers is a ma­jor metric used by investors to evaluate a company's value, not only Internet content providers but also cable TV providers, wireless phone providers, and so on. Yahoo!'s goal was to lock in users and increase their switching costs of turning to a new portal.

To facilitate this process, Yahoo! provided fea­tures that made it possible for users to customize Yahoo!'s Web pages and services to better meet their specific needs. For example, Yahoo!'s registered us­ers could customize its popular news service to show the specific news sections they were the most inter­ested in, such as technology or entertainment, or users could input their personal portfolios into its financial Web page and track their portfolio's value over time. The financial Webpage also provided links to message boards where individual investors can jointly discuss a company's prospects. The abil­ity to create a high level of customization created major switching costs for customers. Once users cre­ated their portfolios, personal pages, shopping lists, and other profiles, they would be much less likely to want to repeat this process by signing up at another Web portal—unless it offered some other "killer ap­plication," or compelling content, which of course is what Google and Facebook have been able to offer in the 2000s.

Yahoo! worked hard to remain the Web por­tal of choice by continuing to introduce additional kinds of online services as soon new startup Internet companies had showed their services were popular among online users. It developed a strategy of ac­quiring the leading Internet company in a particular online area, for example, online dating, to extend its portfolio of services, and keep its leadership as an online portal, thereby increasing its value to its users. In 1999, for example, it made three important acquisitions, RocketMail, an e-mail service provider that became the basis for Yahoo! Mail; GeoCities that provided a free Web-hosting service to regis­tered users, which allowed them to publish their own personal homepages (containing material of their own choice) and to share it with friends and any other interested parties. Lastly, it bought Broad­cast.com, an early leader in online streaming digital audio and video programming that allowed Yahoo! to broadcast audio and video content on all its chan­nels to users. Yahoo!'s goal was to make its services even more valuable to its users—and thus to its ad­vertisers as well—so that these acquisitions would result in increasing advertising revenues. Then, in 2000, Yahoo! acquired eGroups, a free social group/ mailing list hosting service that allowed registered users to set up any kind of online group of their choice, and use it as a forum to attract other Inter­net users that shared their interests; soon hundreds of thousands of specialized groups had been estab­lished. Yahoo! integrated eGroups into its successful Yahoo! Groups service to develop and strengthen its services, and today it has millions of registered groups of users and is a popular mailing list service for all kinds of social networking purposes. Yahoo! paid billions to acquire these companies, however, because this was the time of the dot.com bubble;

Case 23: Is Yahoo!'s Business Model Working in 2011?

afterwards the value of these acquisitions plunged—as did Yahoo!'s stock.

In addition to the services just mentioned, Yahoo! also now provided services such as Yahoo! Messen­ger, an instant messaging client that allowed for on­line chat; Yahoo! Games, a successful game-playing service; and various specialized online retail sites, including an online auction service it had started to compete with highly-profitable eBay. Its original search engine had, by this time, become just one of the many services it provided. As it turned out, Koogle's (and Filo and Yang's) failure to realize the central importance of Internet searching was a ma­jor factor that led to Yahoo!'s later problems—just as this same error hurt Microsoft, AOL, and all the other major search portals. Google was the excep­tion, as it was focusing its efforts on search capabili­ties, although its reasons were not obvious until the early-2000s.

Nevertheless, as Koogle hoped, as the range of services Yahoo! offered expanded, its popularity in­creased as it became a "one-stop shop" that could cater to most kinds of services that Internet users' needed—information, entertainment, and retail, for example. Its expanding business model seemed to be working. Most of its services were provided free to Yahoo! users because the advertising revenues it earned from the ads on the millions of Web pages on its portal were the primary source of revenues in its profitable business model. In addition, it earned some revenues from the fees it charged sellers and buyers on its shopping and specialized retail sites. Also, Yahoo! charged for specialized services such as its personals dating service, a streaming stock quotes service, a job hunting service, and various premium e-mail and Web storage options that provided users with more kinds of value-added solutions. This also helped to increase revenues and earnings.

The success of its strategy of bundling online ser­vices to attract ever-greater numbers of users became clear as Yahoo!'s user base exploded. By the end of the 1990s, 15 million people a day were visiting Yahoo! and it had become the most visited portal on the WWW. Its business model, based on the idea that the more services it offered, the greater the num­ber of Internet users it would attract, (and the higher would be the advertising fees it could charge compa­nies) seemed to be working. In 2000, Yahoo!'s stock price reached the astronomical height of $237, its market value was $220 billion!

Big Problems Face Yahoo!

Just 2 years later, however, Yahoo!'s stock had plum­meted to just $9 a share, which valued the company at less than $10 billion. Why? Because the dot.com bust sent thousands of Internet companies into bankruptcy and caused an across-the-board plunge in their stock prices. However, Yahoo! was still re­garded as a dot.com powerhouse and many analysts put some of the blame for the fall in its stock price (eBay's did not fall greatly) on managerial mistakes at the top of the company—in particular on the way Yahoo!'s business model had developed over time.

CEO Tim Koogle had staked Yahoo!'s continuing success on its ability to develop an increasing range of compelling Web content and services to drive in­creased visits to its portal and generate more adver­tising and e-commerce revenues. The problem with this business model was that it made Yahoo!'s profit­ability (and stock price) totally dependent upon how fast advertising revenues increased—or how fast they fell. The dot.com bust and the economic reces­sion that followed in the early-2000s led to a huge fall in the amount large and small companies were willing to spend on Internet advertising. As its adver­tising revenues plunged, Yahoo!'s stock price plum­meted, and its investors' hopes of increasing revenue growth disappeared. Moreover, it turned out that Koogle had spend far too much money—billions too much—to pay for acquisitions such as GeoCities and eGroups (especially given that these companies prof­its were also highly dependent on Internet advertis­ing!). Had these companies remained independent, they would now be valued at a fraction of the price Yahoo! paid for them.

Advances in Internet and Digital Ted' lologies

At the same time, Internet and digital technologies were continually advancing and improving, and that lowered the value of the acquired companies' distinctive competencies, and therefore their com­petitive advantage in providing a specific online service—the primary reason why Yahoo! acquired them. Technological advances had made it easier for entrepreneurs to start new dot.coms that could provide similar kinds of specialized Internet services

Section B: Corporate Level Strategy Cases

that Yahoo! offered—but which also had a new twist or killer application that was better than Google's. Thus in the 2000s, competitors like Monster.com, MySpace, and YouTube emerged offering digital services that proved so attractive they also became leading Web portals in providing a particular kind of online application: job hunting, social networking, and online video, respectively. These portals became major threats to Yahoo! because they siphoned off its users, and reduced its advertising revenues, which at that time were mainly based on the number of users visiting a Website. Now, Yahoo! lacked the re­sources to buy these portals, it had spent its cash and its stock price was low.

Searcri Eng'Ine's 3ecome More Powerful: The Growhg Threat from Google

On the search engine front as well, the search in­formation service that had been the key to Yahoo!'s rise and its original distinctive competence was also experiencing a new threat. Yahoo! was experiencing increased competition because of the growing popu­larity of Google, a small, relatively unknown search engine company in 2000. By the early-2000s, how­ever, it became obvious to Web watchers that Google was pioneering advances in WWW search technol­ogy that was making Yahoo!'s hierarchical directory classification obsolete! Yahoo!, like other major Web portals such as Microsoft's MSN and AOL had failed to realize how the search function would increase so much in importance as the breadth and depth of information on the WWW increased. It had become increasingly difficult for Internet users to locate the specific information they needed. The search engine that can find the specific information users want in the fastest time is the one that wins the search en­gine war, and Google's proprietary technology was attracting more and more users by word of mouth—just as Yahoo!'s directory had grown in popularity so fast in the 1990s. Yahoo! had been providing more and more kinds of online services but in the process had forgotten—or lost—the reason for its origi­nal success. Perhaps a professional manager at the helm was not such a good idea in the first place. Or, perhaps Filo and Yang were simply enjoying their newfound wealth and had not worked to improve

Yahoo!'s search engine technology because it had be­come a portal providing so many different kinds of information services.

Me Web Porta] IneAstry

To appreciate the problems Yahoo! was now fac­ing, it is necessary to understand how the incredible growth in the 1990s of the Internet and WWW, and rapid advances in Internet hardware and software, changed the function of Web portals dramatically over the 2000s.

Internet Service Provider Portals

The first commercial portals were entry or access portals called Internet Service Providers (ISPs) that provided people with a way to log on to the Internet. For example, companies such as CompuServe, MSN, and AOL offered customers e-mail service and access to the WWW for time-related fees. Slow dial-up con­nections meant high monthly fees, and early on, ISPs charged users for each individual e-mail they sent! Moreover, once on the WWW, users were hampered by the fact that there was no Internet Web browser available to help them easily find and navigate to the thousands (and then millions) of Web pages and Websites that were emerging. Yahoo!'s directory, and then Netscape's Internet browser (introduced in 1994), changed all this. So did the growth in the number of search engines, including early leaders such as AltaVista, Inktomi, and Infoseek, that were all available to help users surf the Web. Typically, a user would connect to the Web through an access portal, and then go to their specific search engine of choice to identify Websites of interest, which they could then bookmark as favorites using Netscape's Web browser.

Produ l 3r,ndling Portals

When Yahoo! became the leading search engine, this began the second phase of portal development, the product bundling or aggregation phase. Dot.coms such as Yahoo!, AOL, MSN, and hundreds of other now defunct Web portals were competing to

Case 23: Is Yahool's Business Model Working in 2011?

attract Internet users and become the main portal of choice—to obtain advertising revenues. Now dif­ferences in the business models of different portals became increasingly clear, for example, portals like Yahoo! focused on offering users the widest possible selection of free Internet services to create switching costs and develop brand loyalty. Others, like AOL and MSN, adopted the fee-paying model, in which users paid to access the Web through a dial-up con­nection their portals provided, then they could use the range of services they offered free or for a charge for a premium service, like personals.

Competition between these combined access/ aggregation portals increased as they strived to at­tract the tens of millions of new Internet users who were coming online at this time. The bigger their user base, the higher the potential fees and advertising revenues they could collect, so the price of Internet service quickly fell. By the mid-1990s, AOL made a major decision to offer its users unlimited Internet connection time for $19.95 a month. In the U.S., this attracted millions of new customers, and AOL be­came the leading access and aggregation portal with over 30 million users at its height, followed by MSN, and many other smaller ISPs.

The competitive problem these ISP/aggregated service portals like AOL faced from the beginning was that once their users were online, they would search out the "best of breed" Web portal that could provide them with the particular kind of informa­tion service they most wanted. So, millions of AOL subscribers, for example, used the portal to get on­line, but then used the myriad of services available on Yahoo! and other portals. The business model used by AOL, MSN, and others was to improve their content to keep subscribers on their portals in order to obtain the vital advertising and e-commerce rev­enues that Yahoo! was enjoying.

The problem soon facing the ISP/aggregation portals was that new companies started to offer lower-priced Internet access service, and, especially, that developing broadband technology had started to rapidly grow in popularity because of the speed it offered in using and downloading the wAxrw ser­vices or content that users wanted. This worked in favor of free portals like Yahoo! that did not gener­ate revenues from getting users online. But, it began to hurt fee-based portals such as AOL and MSN that soon experienced falling revenues as new and existing Internet users chose faster broadband ISP connections, and users continued to gravitate to por­tals such as Yahoo!, eBay, Amazon.com, MySpace, YouTube, and other similar sites.

Customized Portals

In fact, the next major development in Web portals arrived when some Web portals started to special­ize in developing "deeper" relationships with their users. Their goal was to offer their users an increas­ingly customized online experience that set out to help users make better or more informed choices when buying goods or services. Internet book-selling Amazon.com was one of the first portals to pioneer the development of the personalized or custom­ized shopping experience. Amazon.com's software focused upon providing more information to users by, for example, allowing people who had bought books to provide detailed feedback to users about a particular book—and subsequently all kinds of products that it sold. Similarly, one of Amazon.com's central goals became to track its users around its site to help them find other products that they might be attracted to. Amazon.com's database recorded each user's buying preferences to help them make better buying decisions, and in the 2000s, its tracking tech­nology became so invasive it developed software to track its users as they surfed the Web on other sites to find new products to offer them. Not surprisingly, many of its users thought this was an invasion of their privacy, but in the last decade these new track­ing technologies have proliferated, and few ordinary Internet users today are aware of how much infor­mation is being collected about them by tracking companies that can sell this information to advertis­ing companies.

All the major portals began to realize the impor­tance of offering users a customized online experi­ence, to increase their switching costs, and to keep them loyal, repeat users so their purchases and use could be tracked. Yahoo!, for example, uses "bea­cons" that allow it to follow its users around the WWW unless they choose to turn off this feature to increase their privacy. All the major portals began to make the "My" personal preferences choices on their portals a more important part of their service such as "MyAOL and MyYahoo! in order to be able to increasingly target advertising toward specific customer groups and make their portals easier to

use by, for example, offering easy online payment checkout services.

However, it became increasingly apparent that the "best of breed" or leading category Web por­tals were quickly developing a first-mover advan­tage and strong brand loyalty. Amazon.com's stock price had also plunged after the dot.com bust, but it still pursued its business model to develop the online software that would attract the most cus­tomers and allow it to become the leader in Internet retailing. It succeeded, and was able to withstand the challenge from the thousands of other shop­ping portals that had sprung up in the 2000s, but Amazon.com also crushed the shopping channels of leading portals such as Yahoo! and AOL. Simi­larly, Yahoo!'s online auction service, despite that it was free to its registered users, could not compete with online auction leader eBay because eBay had gained the first-mover advantage, and its popular­ity allowed it to offer buyers and sellers a much larger market (and therefore a much better selec­tion and higher prices).

Yahoo! Problems Increase throughout the 2000s

In the 2000s, it became clear that the two biggest sources of revenue and profit for Web portals were those gained from e-commerce, for example, from online retail and auction sales, which has been the source of Amazon.com's success in the 2010s; and to the generation of and sale of online advertising revenues. In the search engine segment of the market, the search engine company that could quickly pro­vide online customers with the specific information necessary for them to make the best purchase possi­ble, attracted the most advertisers, and could charge higher advertising rates. Google's strategy to con­tinuously increase its competencies to provide fast, relevant information has, of course, been the busi­ness model behind its huge success, and the failure of most other search engine companies, including Yahoo! and MSN. However, customized portals like Facebook that provide specialist services such as so­cial networking, could also earn high advertising and e-commerce revenues. Facebook's software platform and huge user base has allowed it to collect detailed information about its users that it can sell to generate

targeted advertising revenues. In addition, its online games, such as CityVille, provided by Zynga, allow it to generate revenues from the fees it can charge game providers, retail providers, and others.

Many analysts argued that when Yahoo!'s stock price was at its peak, it should have purchased other e-commerce companies that were generating revenue by other means than advertising—such as eBay—so that it could have broadened the source of its rev­enues and reduced its dependency on advertising revenues. If advertising revenues decreased, Yahoo!'s profitability and stock price would plunge. In the early-2000s, Yahoo!'s stock price plummeted as the dot.com bust led to a huge fall in advertising rev­enues, and investors began to realize the weaknesses associated with its business model.

Yahoo!'s disastrous performance convinced its board of directors that new leadership was needed, and Tim Koogle was replaced as CEO by Terry Semel, an experienced Hollywood media ex­ecutive who had once controlled Warner Brothers. To change Yahoo!'s business model, especially as it could no longer afford to acquire specialized Web portals, Semel adopted new strategies to generate in­creased online revenues.

First and foremost, Yahoo! needed to improve its search engine technology, a major portal attrac­tion, to generate more users and advertising rev­enues. As time went on, and the success of Google's business model became increasingly obvious, Yahoo! focused upon improving its search soft­ware to beat Google at its own game and develop the ability to offer high-quality targeted advertis­ing. Also, Semel decided to pursue a new content-driven strategy, and Yahoo! internally developed new kinds of services, and acquired small special­ist Internet companies that could provide it with the new competencies it needed to compete in new emerging online information and media market segments. For example, Yahoo! acquired HotJobs, a leading Internet job hunting and placement com­pany, and it began to expand its global news and media services operations.

Recognizing the growing importance of digital communications media to generate advertising rev­enues, it established a new Media Group function to develop advanced imaging and video news content to take advantage of increasing broadband Internet access. Yahoo! launched its own video search engine service in 2005, and revamped the Yahoo! Music

Case 23: Is Yahoo!'s Business Model Working in 2011?

download service; it also acquired Flickr, a leading photograph hosting and sharing site. All these strate­gies were designed to become a part of its new so­cial networking strategy in order to compete with MySpace, YouTube, and Facebook. In fact, Yahoo! lost its battle to acquire YouTube to Google in 2006, and, of course, the fast growth of Facebook de­stroyed its chances to develop a popular social net­working site, as Facebook overpowered MySpace, which had been purchased by News Corp. The fast-changing fortunes of Web portals is shown by the change in MySpace's fortunes; in 2005 it was valued at $3 billion, but its owner New Corp. was happy to divest it in 2011 for $100 million.

Semel continued to try to make new acquisitions to revitalize the appeal of Yahoo!'s hundreds of dif­ferent online content and media services to create a more customized, social network-like appeal to its users. Yahoo! launched a personalized blogging and social networking service Yahoo! 360°, re­vamped its MyWeb personal Web hosting service, created a new PhotoMail service, and purchased online social event calendar company Upcoming .org to compete with Google's new online calendar service. Continuing its push to strengthen its social networking services. Yahoo! acquired blo.gs, a ser­vice based on RSS feed aggregation and del.icio.us, which allows registered users to create a scrapbook or notebook of information they wish to keep from the Websites they visit, similar to Google's note­book service.

Semel's content-driven strategy was to make Yahoo!'s media and entertainment services so use­ful and attractive to online customers that they would be willing to pay for them—in the form of once-and-for-all or monthly fees for services. For example, monthly fees for personal ads in its dat­ing site, or ads to sell or rent merchandise like cars or homes, and fees that provided premium services in areas such as e-mail, data storage, photo shar­ing, e-commerce, message boards, and similar ser­vices. Also, it followed Amazon.com's initiative and worked to provide online software to generate fees from small businesses that wished to link to its Web portal and use Yahoo!'s specialist services to create, host, and manage their retail stores. Through these moves, Yahoo! kept its position as the most popular portal; its revenue more than tripled from 2003 to 2006 to over $6 billion, and its stock price recovered somewhat in the first half of 2006.

New Problems v-*

a Content‑

Dn:ven Strategy

By the summer of 2006, things were not so rosy, and major questions were surfacing about how Yahoo!'s content-driven strategy could continue to drive its revenues in the future as competition, especially as Google's and Facebook's popularity increased. Yahoo!'s stock fell 25% in the last half of 2006, and analysts worried that these popular search engine and social networking portals were stealing away its us­ers, and that advertising revenues and user fees would fall in the future. For example, Google was now offer­ing an ever-increasing number of free online services such as e-mail, chat, storage, and word processing software to compete with MSN as well as Yahoo!

In an internal e-mail leaked to the media, one of Yahoo!'s top managers expressed concern that many of its new investments in content and services were too expensive, unlikely to generate much profit, and it would not be able to keep up with agile new spe­cialist portals; Google was becoming an Internet Gi­ant. In the "Peanut Butter" memo, senior executive Brad Garlinghouse described Yahoo! as a company in search of a successful business model and strategies: "I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular. I hate peanut butter. We all should." He had good reasons for his concern because the new specialist portals were more popular than Yahoo!'s own instant messaging and e-mail service, and, especially, in online imaging and video that had become increasingly important to In­ternet users. For example, Google drew further ahead of Yahoo! after its purchase of YouTube in 2006.

Nevertheless, Yahoo! still had impressive con­tent covering sports, entertainment and finance, in particular. Also, it had embarked upon a major push to enhance the mobile delivery of all its services to better meet the needs of people on the go as the number of people using mobile-computing devices such as smartphones soared through the end of the 2000s, and is still growing in 2011. By 2008, for ex­ample, mobile video was a killer application, and to compete with Google, Yahoo! had heavily invested to upgrade this service—but eventually Yahoo! was forced to shut down its video service to cut costs.

The problem for Yahoo! was that its cost structure was increasing and it had lost its first-mover advan­tage to its new rivals—not a good position in the fast-changing online world.

The Search Engine Dilemma

A discussed earlier, for online digital media compa­nies it had become essential to improve their search engine capabilities. Only Google had understood the crucial strategic relationship between providing us­ers with fast, accurate search results, and the search engine provider that gives the ability to generate increasing advertising revenues. Google's business model was based upon providing better search ca­pabilities and then providing an increasing number of free online services to attract more users and de­velop brand loyalty. To achieve significant revenue and profit growth, Semel recognized that Yahoo! also had to increase the capabilities of its search en­gine and generate the high volume of user visits that lead to increased revenues from online advertising and facilitating e-commerce transactions. Semel be­gan to look for acquisitions to strengthen and im­prove Yahoo!'s search engine, and it bought several search companies such as Inktomi and Overture to improve its search competences. However, Google was unbeatable; its share of the search engine mar­ket was double that of Yahoo!'s-49% compared to Yahoo!'s 24% in 2006—and Microsoft's own search engine also plunged in popularity.

To meet Google's challenge, Semel combined the distinctive competencies of Inktomi and Overture, with its own in-house technology, to develop an im­proved search engine that would allow Yahoo! to of­fer a much more targeted online advertising program to compete with Google's—Project Panama. This huge, expensive project soon fell behind schedule, the company failed to launch it according to schedule, and Yahoo!'s stock price continued to plunge as it played catch up to Google and the other specialized Web portals. In fact, in 2005, Yahoo! and Google were neck-and-neck and each had about 18% of to­tal online advertising revenues. By the end of 2006, Google's revenue had grown to 25% and Yahoo!'s had dropped to less than 14%.

In 2007, Semel reorganized Yahoo!'s management structure to allow it to better implement its business model and compete with its rivals—a shakeup sparked

by the peanut butter memo. The new streamlined organizational structure grouped Yahoo!'s services into three primary product divisions, one focused upon satisfying the needs of its Website users, one upon finding better ways to service the needs of its advertisers, and one upon developing new technology. Semel hoped the reorganization would make Yahoo! more proficient at delivering online services and ads to capture the attention of online users. In 2007, Yahoo! rolled out its new targeted advertising system and announced that it expected major improvements in advertising revenues by the summer. Revenue per search query may grow by 10% or more in the second half of the year, and Semel said, "We believe this will deliver more relevant text ads to users, which in turn should create more high-quality leads. By the time we get to 2008 and beyond, this is a very, very, significant amount of additional profit and I'm pleased with the tangible progress we have made. I'm convinced we're on the right path." Yahoo!'s stock increased by over 10% as investors bet that this would be a turnaround moment in Yahoo!'s battle with Google.

Jerry Yang T3:^,::-)s Over as CEO

Semel and Yahoo! Investors were wrong. The num­ber of users, including registered Yahoo! users, of Google's advanced search engine and other services, and the rapid development of popular specialized portals such as YouTube, and social networking Websites like Facebook, continued to siphon off mil­lions of visits to Yahoo!'s Website. At the same time, the number of Yahoo! employees needed to pro­vide the new advanced media services it was trying to offer soared, and so did its R&D costs; its cost structure increased. Also, at the same time, Micro­soft recognized it had been slow to develop its search competencies and it began to pour billions into de­veloping an advanced search engine called "Bing" that emerged at the end of the 2000s.

Investors lost confidence in Semel, who was forced out in 2008, and Yahoo!'s new CEO was now one of its original founders Jerry Yang. Yang spent the next 8 months streamlining Yahoo!'s business model, prioritizing the importance of its vast array of online services, and improving its search and ad­vertising competences, while reducing its workforce to cut costs. But the Google Juggernaut was roaring ahead, and the value of Yahoo!'s stock continued

to fall, so much so that in late-2008, Microsoft an­nounced that it wanted to acquire Yahoo! for $40 bil­lion, a huge premium over its stock price, before the bid and Yahoo!'s stock soared in value. Microsoft's logic was that its new search engine technology was now mature enough to replace Yahoo!'s and that in combining their search engines and online advertis­ing functions, the merger would reap billions of dol­lars in cost savings. Furthermore, the merger would allow it to combine its MSN online service with Yahoo!'s so its registered customer base would soar, as would the number of users of its new combined Web portal. $40 billion was a lot of money, however.

After the bid, CEO Yang announced that Micro­soft's offer to buy Yahoo! was a "galvanizing" event for his beleaguered company. However, he also made it clear that he was not interested in the takeover bid, and that he would meet with its board of di­rectors to defend against what he expected would turn into a hostile bid. The battle raged for months during which Yang said he was holding out for a higher offer than the current bid that substantially undervalued Yahoo!'s assets. However, many ana­lysts claimed that Yang was dreaming, and that the company's founder was not the right person to be in charge of making such an important decision.

Yang was supported by the board, and contin­ued to reject repeated buyout and search-ad deal offers from Microsoft throughout 2008; eventu­ally Microsoft announced it was withdrawing its bid for the company—upon which the value of the company's stock plunged and irate stockholders de­manded that Yang be replaced. During this crucial year, Yang had been distracted by the takeover bid from streamlining the company's business model, so its performance had continued to fall! An exhausted Yang, whose resistance to the merger had personally cost him billions of dollars, decided that his future as CEO looked bleak and he handed over the reins to former Autodesk CEO Carol Bartz who became Yahoo! CEO in January 2009.

Bartz Reorganzes Yahoo!

Bartz has a long history of success in managing on­line companies and she moved quickly to find ways to reduce Yahoo!'s cost structure and simplify its operations to maintain its strong online brand iden­tity. Bartz decided that the best way to restructure

Yahoo! to gain more control over its business units and reduce operating costs was to centralize functions that had previously been performed by Yahoo!'s different business units, such as product development and marketing activities. For example, all the company's online publishing and advertising functions were centralized and put under the control of a single executive. Yahoo!'s European, Asian, and emerging markets divisions were combined and cen­tralized under the control of another top executive. Bartz was astonished to find that Yahoo!'s talented programmers and engineers, who worked in differ­ent business units, didn't talk to each other, and she brought them all under the centralized control of a new executive in charge of product development, Chief Technology Officer Ari Balogh.

Bartz' cost-cutting efforts helped Yahoo! satisfy investors when, in the Spring of 2009, she an­nounced plans to cut 5% more of Yahoo! staff, on top of 1,600 job cuts that had been made in Decem­ber 2008. However, the way she would grow its reve­nues was not clear, especially as she assumed control when the financial crisis and recession had begun in 2009, and online advertising revenues plunged. Bartz said brand marketers put the brakes on ad spending, especially on display ads; the pictorial banners that were Yahoo!'s chief source of business and revenues fell 13% in 2009. Also, Yahoo!'s search engine adver­tising business fell 3% after having made progress in the last few years—Google kept powering ahead. Nevertheless, she had reduced operating expenses by 4% and had not cut employees in key functions such as product development and marketing. Yahoo!'s stock price rose 5% in the middle of 2009.

Although Yang had refused to sell the company he founded, Bartz made it clear that the company was still for sale—at the right price. Microsoft, however, was no longer interested in a takeover as the power of specialized portals such as Facebook, YouTube, and Amazon.com had by now become apparent—being a generalist and offering all things to all users was no longer possible. Nevertheless, the possibility of a ma­jor strategic alliance between the companies, so both could enjoy cost savings from economies of scale and scope in combining their search engine and online-targeted advertising functions, still existed. Essentially, Microsoft sought to obtain many of the advantages it had sought to achieve from acquiring Yahoo! by forming a strategic alliance. Now, Yahoo!'s position was considerably weaker as Bartz had to find ways to

reduce costs given that Yahoo rs revenues were stag­nant or declining in many areas. She needed to keep up the company's stock price, in part, to still make it an attractive acquisition despite the fact that its mar­ket value had now plunged below $30 billion—over $10 billion less than Microsoft had offered for the company. In addition, Bartz announced that when the economy turned around, Yahoo!'s strategy for restor­ing growth would capitalize upon its online brand name and large size, and focus on "creating kick-ass products" to drive its growth.

The Agreement with Microsoft

In 2009, Yahoo! and Microsoft announced they had formed a strategic alliance that would benefit both companies in their battle with Google and Facebook. Yahoo! agreed to outsource its back-end search func­tions such as Web crawling, indexing and ranking to Microsoft to save money and use its Bing search engine to enhance its competitive position. In ex­change, Yahoo! agreed to pay Microsoft a commis­sion for paid search ads sold on Yahoo! and Yahoo! partner sites. Yahoo! estimated that this alliance would boost its annual operating income by about $500 million and reduce costs by about $200 mil­lion. Nevertheless, Bartz noted that "Search is a very valuable business for Yahoo!; we need to retain some stake in search to help it target display ads better. Search is important to our users and search is impor­tant to our advertisers."

At the same time, Bartz continued to prune Yahoo!'s unprofitable online services to reduce costs and focus its efforts upon the fastest growing, most profitable ad display markets. Yahoo! also an­nounced continuing job cuts throughout 2009 and 2010 to reduce its workforce to under 14,000 and bring costs back under control.

Yahoo! in 2011

In June 2011, Yahoo! announced some disappoint­ing results, in the most recent quarter its revenues had dropped by 23% compared to a year ago while Google announced that its revenues had increased by 32%. In the past year, Yahoo!'s 14,000 employees had generated $5.6 billion in revenues and $1.2 billion in

profit, while Google's 29,000 employees had generated $33 billion in revenues and $9 billion in profit. Why?

First, Yahoo! had not obtained the potential ben­efits it had expected to receive from its deal with Microsoft; although it was guaranteed a minimum payment of $450 million per year, the alliance had not generated a major increase in the number of vis­its to its search engine. However, Bartz said she ex­pected revenues to substantially increase by the end of 2011 as the Bing search engine used by Yahoo! was increasing in popularity.

Second, Yahoo!'s targeted display advertising business had not performed as well as expected and profits had significantly fallen. However, Bartz an­nounced that the costs of upgrading Yahoo!'s adver­tising platform and making it consistent across its global Websites was the main reason for this. With its new systems in place, Yahoo! would be able to de­liver targeted advertising faster across all its different online services globally, and to provide companies with more effective advertising. Also, Yahoo! could now deliver its content and ads on all kinds of mo­bile computing devices, not just desktops, and Bartz stressed Yahoo!'s leading position in the U.S. and abroad in important content channels such as news and finance. However, Yahoo! has faced increasing competition from Facebook and Google, and inves­tors worried if it could recover revenue in this highly lucrative market segment.

Yahoo!'s stock fell after this report, especially be­cause it also announced lower revenue guidelines for the rest of 2011. But, its stock also took a major hit in June 2011 when it was announced that Alibaba, a huge Chinese Web portal, in which Yahoo! owns a 40% stake, had spun off its Alipay online payment service into a new company—without securing agree­ment from Yahoo!. Alibaba is worth many billions to Yahoo!, so this seemed to wipe off billions more of its market value and its stock plunged again. In August 2011, Bartz announced that Yahoo! would receive between $2 and $6 billion if and when the Alipay service was eventually spun off in an initial public offering, but this further reduced the value of its Alibaba investment and damaged Bartz' position. In August 2011, Yahoo!'s market value was about $18 billion, and 2/3 of that value was made up of its Asian assets valued at $9 billion, its $3 billion in cash; what was left was Yahoo!'s global online assets, now valued at around $6 billion. Microsoft had offered to pay $40 billion for its assets just a few years ago!

Case 23: Is Yahoo!'s Business Model Working in 2011?

Thus, in August 2011, Yahoo! analysts could not decide if Yahoo! was undervalued because its online properties still offered the possibility of generating substantial revenue from search and advertising. Or, if its value might decline further in the future be­cause it now had given up its online search expertise to Microsoft? It could not counter the strategies of Google and Facebook, and there was still no pipeline of innovative products to attract new users. Bartz' turnaround plan for Yahoo! had kept the company profitable because it had reduced costs, but what was its future vision and mission?

Yahoo! Fires Bartz

In September 2011, Yahoo!'s board of directors de‑
cided to fire Bartz—over the phone—claiming she
had not found the right strategies to turn around the

Endnotes

www.yahoo.com, 1990-2011. Yahoo! 10K Reports, 1990-2011.

company. Yahoo! was in disarray in October 2011 as no new strategic leadership had emerged to or­chestrate the company's turnaround and a stunned Bartz tweeted through her iPad that "Yahoo has. . . . me over." It seems that Yahoo!'s dysfunctional board is desperately trying to find a buyer for the company in order to provide stockholders with the most value for their investment.

In October, Microsoft, Google, and private investment funds had all been suggested as po­tential buyers for the company at a price around $20 billion—half of Microsoft's original offer. The company was still for sale—but the billion dollar question is at what price? The longer it takes to find a new buyer the less valuable Yahoo! is likely to be in the future—unless it can find some vision­ary CEO that can provide the company with a new vision and mission.