Paul Graham, the founder of tech incubator Y Combinator, has posted some thoughts about the decline of Yahoo (s yhoo) 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 (s goog) 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.”
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 (s msft), 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.