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Reinvention and the Road Ahead
"No company better reflects the zeitgeist of the Internet bubble than Yahoo!, which grew from a part-time hobby cataloging Web sites to a $130 billion media company to just another dot.com struggling to remake its business model-all within a span of seven years. Karen Angel walks readers through the company's history, which is less about geeks and technology than it is about making technology less geeky (i.e., more accessible) to ...
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Reinvention and the Road Ahead
"No company better reflects the zeitgeist of the Internet bubble than Yahoo!, which grew from a part-time hobby cataloging Web sites to a $130 billion media company to just another dot.com struggling to remake its business model-all within a span of seven years. Karen Angel walks readers through the company's history, which is less about geeks and technology than it is about making technology less geeky (i.e., more accessible) to regular people. Along the way, the company's founders, David Filo and Jerry Yang, learned many invaluable lessons. Inside Yahoo! is not only an interesting book but also an important one."
-Adam L. Penenberg, investigative journalist and coauthor of Spooked: Espionage in Corporate America
"Inside Yahoo! is a drama about people, but it also describes how Yahoo! the brand reflected the impact of the Internet. Initially perceived as a fad, it soon became a part of our lives so that now it is as hard for anyone to imagine life without Yahoo! as it is to imagine life without electricity. Yahoo! helped make the technology become invisible-like the Cheshire Cat."
-John Taysom, founder and Managing Partner, RVC Reuters Greenhouse Fund
April: Jim Clark and Marc Andreessen form Mosaic Communications to market the Mosaic browser, which was released by the National Center for Supercomputing Applications in 1993 and sparked the Internet revolution.
October: Mosaic changes its name to Netscape Communications.
October: The first version of Netscape Navigator is launched.
Looking back on Internet mania, one company stands out: Yahoo. It's as potent a symbol as any of the late 1990s phenomenon that swept popular culture, the stock market, the entrepreneurial set, and the economy at large. This is the story of two procrastinating graduate students who turned what was a part-time project into a major media company, its starry rise in fortunes, and its equally stunning fall from grace. Yahoo's guide to the World Wide Web, a directory that simply catalogues Web sites and makes them easier to find, is the most used of its kind. More than 200 million people a month reportedly were clicking on it in late 2001, to find everything from current stock quotes and news to chat rooms about biochemical warfare and infertility-and that audience gave Yahoo a reach greater than that of most major media networks.
It was this reach-and the notion that in the future, everyone would be using the Internet for everything for which they had turned totelevision, radio, newspapers, and movies-that propelled Yahoo's stock to such incredible heights that at its peak, Yahoo was worth more than traditional media companies like the Walt Disney Company and News Corporation-combined. Yahoo held the promise of becoming the major media company of the twenty-first century.
In 1996, when Yahoo went public, investors went crazy for its stock. The stock continued to climb throughout the late 1990s and 2000, hitting a split-adjusted high of $237.50. But in March 2000, the inflated Internet bubble began to lose air. The stock market crashed in April and continued to decline throughout the rest of the year. And with that decline came the demise of many well-known dot-coms, including Pets.com, Living.com, and Value America. As the dot-coms began to fail, they stopped advertising. At one point, 47 percent of Yahoo's advertisers were dot-coms that themselves were flying high, flush with venture capital dollars to spend on marketing and gaining the greatest mind share, because at the time, the conventional wisdom said whichever company could grow the fastest, and attract the most "eyeballs," would be the one that would succeed.
Reality hit. Investors no longer were salved by talk of future profits at the expense of current growth. Investors wanted to see these companies show profits. Now.
Ironically, the demise of hundreds of dot-coms also hurt Yahoo, one of the few dot-coms that seemed to have everything going for it. And in January 2001, Yahoo lowered its future outlook for the first time and began the second of what would be five consecutive unprofitable quarters. Revenues were slipping. And someone had to accept the blame.
Yahoo's chief executive officer, 51-year-old Tim Koogle, took the fall. He resigned, and in his place as CEO, Yahoo's board hired a Hollywood veteran, Terry Semel. He, with partner Bob Daly, had headed the venerable Warner Brothers entertainment conglomerate for seven years. But was he the leader Yahoo needed to steer the ship from treacherous dot-com waters toward safer, profitable shores?
Sure, after he had left Warner and started his own investment firm, Windsor Media, he became a venture capitalist of sorts, plowing millions of dollars into Internet entertainment start-ups like the Digital Entertainment Network (DEN) and Nibblebox. But his bets don't make him look like a seer. DEN burned through more than $60 million building television-style shows that would be "netcast"-broadcast over the Net-to an audience that never materialized. A good idea, but one before its time, and a costly lesson learned.
As a vote of faith in the company, and in himself, Semel bought 1 million shares of Yahoo stock in a private placement. When he joined Yahoo, its shares were worth $17.62. Eight months later, he had lost $6.5 million of his investment on paper.
Yahoo is struggling to transform its business to one where its users, who are accustomed to getting everything for free, are willing to pay for some services, like online personals, real-time stock quotes, and Web storage space for e-mail and photos. At Yahoo's peak, more than 90 percent of its sales came from advertisers. In November, it still was deriving 80 percent of its revenues from that stagnating source.
Sales continued to decline, and though Yahoo's cost-cutting measures were lauded by analysts, they weren't enough to bring the company back to profitability. In October, Yahoo reported its fourth consecutive quarterly loss and its lowest revenues since the third quarter of 1999.
When Semel announced the distressing news in October 2001, he did it against the backdrop of the September 2001 terrorist attacks against the United States. Though the attacks weakened an already anemic economy, Semel pointed out that in the midst of the fear and uncertainty, one thing was clear: The Internet was an invaluable tool in the time of crisis. While telephone networks around New York City and Washington, D.C., failed, millions of users communicated with friends and loved ones via Yahoo Mail and Yahoo's Internet telephony. Within three hours of the attacks, Yahoo had posted three buttons: one for the American Red Cross, one for the New York Firefighters 9-11 Disaster Relief Fund, and another for the Salvation Army. Within two weeks, Yahoo users had donated more than $30 million to the relief funds. "That's when you know you're part of something big," Semel said during the company's October 10 conference call, in his marked Brooklyn accent.
The Internet most certainly is something big. But will Yahoo remain something big, on its own?
* * *
The hobby that would become Yahoo coalesced in spring 1994. Just months away from completing their dissertations in computer-assisted design, with their Ph.D. adviser conveniently off on sabbatical for the year, Jerry Yang and David Filo were obsessively compiling a list of their favorite Web sites, among them such choice samples as Brian's Lava Lamp, Nerf: Foam Weapons Arsenal, and Quadralay's Armadillo Home Page. Soon they were spending almost all their time on the index-up to 40 hours a week-and very little on their dissertations.
The browser Mosaic, precursor to Netscape, had just been developed by Marc Andreessen and his team at the University of Illinois' National Center for Supercomputing Applications, meaning millions would soon be flocking to the Web. In 1990, the number of Web sites was all of about 12, and they belonged to universities and government. But by 1993, after Mosaic ushered in point-and-click navigation by replacing the complicated text interfaces that ruled the Web with a simple graphical browser, the number of sites rose into the thousands and was poised to leap into the millions. And Yang and Filo were ready to provide a contextual framework for this jumbled mass of content. "Two years earlier, nobody needed a Web index; two years later, someone else would have been forced to make some sort of comparable index," they write in Yahoo! Unplugged.
Or as Yang told Red Herring in an interview in 1995, "We jumped on Mosaic at the beginning of 1994. We really didn't think much of it at first. Nobody did. Maybe Andreessen or somebody. I kept bugging Dave to show me the sites he had found. So he made his hot-list, and I made my hot-list, and he wrote some software to combine both our lists. It started out as a collection of computer-related sites that we were interested in-very much in the vein of what the Web was designed for: to share documents with many people. There was really no altruism involved-we were doing the work, and there was no cost to distribute it, so why not distribute it? I think the inspiration to start listing other sites came from David one day. Maybe he was bored with his thesis. Initially we collected some of the friskier, weirder sites on the Web, and it took off by word of mouth. We were in a unique situation in the summer of 1994 to be able to experience that kind of grass-roots growth, fueled by a lot of interest that was not our doing, and then just sitting back to watch the access logs go up. I don't think that could happen today."
The two developed their own Web-searching software to help them find and index sites. Their grand scheme involved conquering the Web by visiting and categorizing as many sites as they could, creating subcategories when the categories grew too unwieldy, and then subcategories for the subcategories. Stanford donated a trailer to house their operation, legendarily littered with overheating terminals, pizza boxes, dirty clothing, and golf clubs. The index itself inhabited Yang's student workstation, Akebono, named after a formidable Hawaiian sumo wrestler, while the search software was stored on Filo's workstation, Konishiki, also a sumo great. They christened the index Jerry's Guide to the World Wide Web.
"How often do you guys browse the Web, and for how long?" a questioner asked them during a BusinessWeek Online chat in July 1995.
"We live, breathe, sleep on the Web ... just kidding," Yahoos612 (Yang) replied.
"No, he's not," corrected Yahoo df (Filo).
Despite their mutual appreciation for sumo wrestling, the pairing of Yang, then 25, and Filo, 27, was hardly intuitive. In fact, it would be difficult to find two partners with such different backgrounds and personalities, but they did share an unconventional childhood. At the age of eight, the outgoing Yang, Yahoo's goodwill ambassador-to-be, had emigrated from Taiwan with his mother, a widowed English professor, and younger brother. They settled in San Jose, California, where Yang morphed into a tennis-playing academic ace. His leadership skills surfaced early as senior class president and valedictorian at Piedmont Hills High, and he won a full undergrad scholarship to nearby Stanford University-and every other college he applied to, including Berkeley and Cal Tech. Within four years, Yang had bagged a B.S. and an M.A. in electrical engineering. Among the part-time jobs he held to help make ends meet, he worked as a book shelver and sorter in the university library, a stint he told Fortune taught him how to store information systematically. One of Yang's strengths is his ability to apply what he learns in daily life, according to Stanford professor John Hennessy. "Like all the best students, Jerry has channeled his everyday experiences well," Hennessy said in Fortune.
While Yang was struggling to learn English, which he mastered well enough to move from remedial to advanced classes by his third year in San Jose, Yahoo's future head technologist was growing up in a commune in Moss Bluff, Louisiana, sharing a garden and kitchen with six other families and learning to pitch in. "I remember looking at the Erector Set catalogue and wanting the fancy pieces-the three-speed motor versus the little one we had," Filo told Wired in January 1999. "But we had a really big set. We could build cranes; we could build bridges. When I was in the fifth grade, my family built a house. My brother and I helped with the roofing, nailing shingles down; we held things. We put up sheet rock and did electrical stuff. I was always fascinated with tools-table saws, routers, lathes. There are eight of us in the family, and the house originally was only about 1,400 square feet. Our bedrooms were seven by eight feet, but we each had our own. Engineering in general is about building things, solving problems. To this day there are so many problems with what we're doing at Yahoo-things still need fixing. What motivated Jerry and me all along was really simple: You try to come up with nice solutions."
The commune experience, however, didn't improve his social skills. When friends and acquaintances describe Filo, the words that crop up again and again are "quiet," "reserved," and even "withdrawn." In fact, "some of Filo's friends affectionately nicknamed him the Unabomber because he was so introspective," writes David A. Kaplan in The Silicon Boys and Their Valley of Dreams (William Morrow, 1999). But if Filo didn't often wow people on an interpersonal level, he did excel academically, landing at Tulane for college before entering Stanford, where he and Yang met in 1989.
Their friendship solidified three years later on a six-month teaching-assistant program in Japan. Another relationship Yang formed there also would play a central role in his life: He met a Stanford student named Akiko Yamazaki, a Costa Rican of Japanese parentage who would later become his wife. And in Japan, Yang's and Filo's paths crossed with that of another Stanford student, Srinija Srinivasan ("Ninj"), who was studying artificial intelligence and information organization and would later join Yahoo as Chief Ontologist. Japan itself would be home to Yahoo's first international outpost, the No. 1 site in that country.
When Yang and Filo returned to Palo Alto and Stanford, everyone was buzzing about Mosaic. In 1993, when Filo's overgrown list of Web-site bookmarks numbered 200, making it useless, they began work on their database.
Trying to pressure Filo into helping come up with a snappier name for the site, Yang briefly changed its name to David and Jerry's Guide to the World Wide Web. "I got sick of taking all the credit," Yang explained in an interview in June 1999 on "Big Thinkers," a program aired on the cable station TechTV. "David hated it. He hates to have his name associated with it. One night we locked ourselves in a room and said, 'We need to come up with something easy to remember.' We wanted to call it 'yet another something,' looked up all the words that started with y-a. Yahoo stuck out. In Gulliver's Travels, it means somebody who is rude, a subhuman species who were rude and uncivilized. That's us." In another sign of the self-deprecating humor friends and cohorts say is typical of Yang and Filo, they decided to make Yahoo an acronym for Yet Another Hierarchical Officious Oracle.
In any case, that playful, irreverent name change provided Yahoo with the ammunition to become a top Internet brand. As early as 1998, market-research firm IntelliQuest reported that 44 percent of Internet users were familiar with Yahoo, and only America Online (AOL) and Netscape had greater name-brand recognition.
Excerpted from Inside Yahoo! by Karen Angel Excerpted by permission.
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Chapter 1. Stanford, 1994.
Chapter 2. Pioneer Way, 1995.
Chapter 3. S.unnyvale, 1996.
Chapter 4. Santa Clara, 1997.
Chapter 5. Staying Put and Scaling Up, 1998.
Chapter 6. The Portal Wars, 1996 to 1998.
Chapter 7. The Euphoria, 1999.
Chapter 8. The Unraveling, 2000.
Chapter 9. The Turmoil, 2001.
Chapter 10. The Semel Era.