What Happened to Yahoo - The Rise and Fall of Yahoo: Where Did They Go Wrong?

Yigit Konur's Curation

"This article written by Paul Graham in 2010 analyzes in detail the reasons for Yahoo's failure. It focuses on two main problems of Yahoo: easy money and contradictions about being a technology company. It points out that Yahoo's methods of making money, especially banner advertisements, have transformed the company more into a media company than a search engine, weakening the company's programming capabilities. It also emphasizes that Yahoo was unable to develop a 'hacker-centered' culture, which negatively affected the company's ability to attract good programmers.

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# What Happened to Yahoo (The Rise and Fall of Yahoo: Where Did They Go Wrong?)

August 2010

When I went to work for Yahoo after they bought our startup in 1998, it felt like the center of the world. It was supposed to be the next big thing. It was supposed to be what Google turned out to be.

What went wrong? The problems that hosed Yahoo go back a long time, practically to the beginning of the company. They were already very visible when I got there in 1998. Yahoo had two problems Google didn't: easy money, and ambivalence about being a technology company.

**Money**

The first time I met Jerry Yang, we thought we were meeting for different reasons. He thought we were meeting so he could check us out in person before buying us. I thought we were meeting so we could show him our new technology, Revenue Loop. It was a way of sorting shopping search results. Merchants bid a percentage of sales for traffic, but the results were sorted not by the bid but by the bid times the average amount a user would buy. It was like the algorithm Google uses now to sort ads, but this was in the spring of 1998, before Google was founded.

Revenue Loop was the optimal sort for shopping search, in the sense that it sorted in order of how much money Yahoo would make from each link. But it wasn't just optimal in that sense. Ranking search results by user behavior also makes search better. Users train the search: you can start out finding matches based on mere textual similarity, and as users buy more stuff the search results get better and better.

Jerry didn't seem to care. I was confused. I was showing him technology that extracted the maximum value from search traffic, and he didn't care? I couldn't tell whether I was explaining it badly, or he was just very poker faced.

I didn't realize the answer till later, after I went to work at Yahoo. It was neither of my guesses. The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If Yahoo merely extracted the actual value, they'd have made less.

Hard as it is to believe now, the big money then was in banner ads. Advertisers were willing to pay ridiculous amounts for banner ads. So Yahoo's sales force had evolved to exploit this source of revenue. Led by a large and terrifyingly formidable man called Anil Singh, Yahoo's sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions.

The prices seemed cheap compared to print, which was what advertisers, for lack of any other reference, compared them to. But they were expensive compared to what they were worth. So these big, dumb companies were a dangerous source of revenue to depend on. But there was another source even more dangerous: other Internet startups.

By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of ""Eureka!"" I was shouting ""Sell!""

Both the Internet startups and the Procter & Gambles were doing brand advertising. They didn't care about targeting. They just wanted lots of people to see their ads. So traffic became the thing to get at Yahoo. It didn't matter what type. [1]

It wasn't just Yahoo. All the search engines were doing it. This was why they were trying to get people to start calling them ""portals"" instead of ""search engines."" Despite the actual meaning of the word portal, what they meant by it was a site where users would find what they wanted on the site itself, instead of just passing through on their way to other destinations, as they did at a search engine.

I remember telling David Filo in late 1998 or early 1999 that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn't worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn't worth doing better.

I didn't say ""But search traffic is worth more than other traffic!"" I said ""Oh, ok."" Because I didn't realize either how much search traffic was worth. I'm not sure even Larry and Sergey did then. If they had, Google presumably wouldn't have expended any effort on enterprise search.

If circumstances had been different, the people running Yahoo might have realized sooner how important search was. But they had the most opaque obstacle in the world between them and the truth: money. As long as customers were writing big checks for banner ads, it was hard to take search seriously. Google didn't have that to distract them.

**Hackers**

But Yahoo also had another problem that made it hard to change directions. They'd been thrown off balance from the start by their ambivalence about being a technology company.

One of the weirdest things about Yahoo when I went to work there was the way they insisted on calling themselves a ""media company."" If you walked around their offices, it seemed like a software company. The cubicles were full of programmers writing code, product managers thinking about feature lists and ship dates, support people (yes, there were actually support people) telling users to restart their browsers, and so on, just like a software company. So why did they call themselves a media company?

One reason was the way they made money: by selling ads. In 1995 it was hard to imagine a technology company making money that way. Technology companies made money by selling their software to users. Media companies sold ads. So they must be a media company.

Another big factor was the fear of Microsoft. If anyone at Yahoo considered the idea that they should be a technology company, the next thought would have been that Microsoft would crush them.

It's hard for anyone much younger than me to understand the fear Microsoft still inspired in 1995. Imagine a company with several times the power Google has now, but way meaner. It was perfectly reasonable to be afraid of them. Yahoo watched them crush the first hot Internet company, Netscape. It was reasonable to worry that if they tried to be the next Netscape, they'd suffer the same fate. How were they to know that Netscape would turn out to be Microsoft's last victim?

It would have been a clever move to pretend to be a media company to throw Microsoft off their scent. But unfortunately Yahoo actually tried to be one, sort of. Project managers at Yahoo were called ""producers,"" for example, and the different parts of the company were called ""properties."" But what Yahoo really needed to be was a technology company, and by trying to be something else, they ended up being something that was neither here nor there. That's why Yahoo as a company has never had a sharply defined identity.

The worst consequence of trying to be a media company was that they didn't take programming serious...