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Summary:

Y Combinator founder Paul Graham says one of Yahoo’s fatal flaws was that it saw itself as a media company, and got used to pulling in easy money for banner ads. Even though the game has changed, Yahoo now has to follow the path it chose.

Paul Graham, the founder of tech incubator Y Combinator, has posted some thoughts about the decline of Yahoo over the past decade, in which he describes the fatal flaws (as he sees them) that caused the company to become less relevant and allowed Google to dominate. The biggest of these, he says, were a surplus of easy money and the lack of a hacker culture, and Graham argues that both were a result of Yahoo thinking of itself as a media company instead of a technology company. While not all of his criticisms are fair, this argument has a lot of truth to it , and for better or worse, Yahoo now has no choice but to continue on the path it has chosen.

Graham says that when he went to work for Yahoo 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.” So what went wrong? “Yahoo had two problems Google didn’t,” he writes. “Easy money, and ambivalence about being a technology company.”

The Y Combinator founder describes a meeting with Yahoo co-founder Jerry Yang, in which Yang seemed uninterested in the technology that Graham’s company Revenue Loop had developed, which was designed to rank shopping-related search results based on traffic. The reason there was so little interest in a tool designed to show the value of different links, Graham says, was that “advertisers were already overpaying for it. If [Yahoo] merely extracted the actual value, they’d have made less money.” At the time, he says, advertisers were willing to pay “ridiculous amounts” for banner ads, because they were still cheaper than ads in newspapers and magazines. But these “big, dumb companies were a dangerous source of revenue to depend upon.”

Yahoo CEO Carol Bartz

The interest from advertisers pushed Yahoo to think of itself as a media company, one which aggregated eyeballs in return for advertising — and that in turn led to Yahoo’s spending spree on content verticals designed to pull in those eyeballs, including an ill-fated attempt to go Hollywood under Lloyd Braun. Graham says he suggested to David Filo in 1998 or 1999 that the company should buy Google because it was a great search engine, but the Yahoo co-founder wasn’t interested because search was such a small percentage of the site’s traffic, and it wasn’t clear at the time just how valuable search traffic could be. Yahoo was getting big checks for banner ads. Why bother with search?

To be fair to Yahoo, all of Paul Graham’s observations may seem obvious now, but they weren’t obvious at all in the late 1990s and early 2000s. The Y Combinator founder himself admits that when he suggested Yahoo buy Google, even he didn’t appreciate just how valuable search traffic could be. It wasn’t until Google showed what was possible by effectively copying the search-keyword advertising model invented by Bill Gross’s Overture (which Yahoo bought) that everyone’s eyes were opened to the potential of search as a revenue generator — at the time, trying to be a media company seemed like a fairly valid approach. Yahoo is also far from the only company to have been blinded by easy money (yes, we’re looking at you, Microsoft).

Whether it was an understandable mistake or a fatal lack of vision, there is no question that Yahoo is effectively out of options at this point. It has no choice but to continue trying to be a media company, and the moves made by CEO Carol Bartz make it obvious that the company has reconciled itself to that fate. Virtually everything that can be sold or outsourced has been, including the outsourcing of search to Microsoft, and Yahoo has been doubling down on its media bets, from hiring dozens of bloggers for its Huffington Post-style media unit to buying user-generated content producer Associated Content.

Although Graham doesn’t mention it, it’s worth noting that while Yahoo’s fortunes have declined sharply, it is still one of the most-visited sites on the web, and it has one of the largest advertising networks of any web company — at a time when advertisers are growing increasingly interested in online options (although many of them may be migrating to Facebook). If aggregating eyeballs still has a chance, then maybe Yahoo does too.

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  1. Sanjay Maharaj Thursday, August 12, 2010

    Great analysis on Yahoo. They probably buried their head deep into trying to become the media company and now it faces an onslaught from social media such as Facebook, Twitter.
    But I still think Yahoo can turn into a great media company as they do have certain things [such as Yahoo Finance] of great value and users will still visit Yahoo for what it does good at which other media companies are not great at doing. I still think they do have a future be it in media but certainly not in social media.

    1. Thanks for the comment, Sanjay.

  2. Funnily enough I just linked to this post as an example of perfect timing – in the UK, the ABC circulation figures for magazines were released today, and it wasn’t particularly good news for most titles and publishers.
    And having pontificated about the reasons why people have stopped buying print so often, a key element of media failure is that so many companies still think like a media firm, and that just paralyzes them in the face of the almost constant change going on at the moment…
    I don’t think Yahoo are about to fall, and I think they can certainly carve out the media role for a while yet – how long they can last in that way without change and innovation is the question? I’d suggest using it as a tactic to short up revenue and reputation in the short term, while they figure out exactly what how they’ll have changed in the next 5 years, because they’ll have to keep changing – we all will!

  3. I think the real question is: how much longer can Yahoo last as a public company? Neither their stock price or bottom line have improved over the past few years. They will have some decisions to make. I’m not sure what will happen but going private has to be on the table because they simply cannot compete anymore.

  4. TerriblyWrite Friday, August 13, 2010

    Yahoo may be trying to be an even bigger media company, but until the quality of its content improves, it won’t be attracting the eyeballs of the folks with money to spend.

  5. great aricle.

    it does seem that platforms will win over content in the online space from an advertising revenue perspective as they just generate so many more page views. Yahoo’s choice to focus on a content play is interesting, but definately doesnt show the best possible alignment. it would be interesting to compare Yahoo’s R&D spend with google’s to see where the companies are going.

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