The Ins and Outs of Yahoo!

Shortly after it was announced that Yahoo CEO Carol Bartz was departing, the always funny Andy Borowitz tweeted:

“The CEO of Yahoo just resigned. I had never heard of her so I Googled her.”

What makes any great comic funny is the truth underlying a punchline.  I wonder if Andy knew just how close he got on this one, which was reported by the Los Angeles Times.  What Andy points to in far fewer words than I will use is precisely the problem of what went wrong at Yahoo.  Yahoo was one of the three great search engines still standing on the web as late as 2009, in fact it was #2 behind Google and ahead of Bing (a.k.a. Microsoft).  Search was in Yahoo’s DNA, it was a core competency, Yahoo was very good at Search and a tremendous amount of self-selected traffic still flowed through Yahoo Search (Microsoft noticed this, too).

Remember that Yahoo bought Overture in 2003, the pioneer of text-link keyword advertising, and honed paid search advertising as mainstream before Google took it to perfection.  Remember also that Yahoo helped put Google on the map when for a long period of time it outsourced Search to Google in exchange for “Powered By” credit and revenue sharing — a business development deal it later regretted because that little “Powered By” logo pretty much put the Google brand on the global map.  At the end of that deal in 2004, Yahoo took Search back and went on to be a respectable competitor to Google.  Sure its Panama search ad buying system upgrade was a little late to market, but it was also very good.

I have great misgivings about the notion of Monday morning quarterbacking any fellow CEO’s performance, since no one on the outside of any problem ever has enough detail or information to make a well-reasoned assessment of someone else’s decision-making. In the case of Yahoo, I offer this personal observation only for the lessons that I believe need to be evangelized.

Early in her tenure, Carol Bartz made a decision to outsource Search and the text ad auction platform to Microsoft. Her rationale seemed to make sense in the savings she would achieve, but that presumed there was no growth left in Search, which had become dominated by Google to the tune of 65% market share, the remaining share going to Yahoo and Bing.  We all know that Microsoft was spending heavily to gain share, up to and including offering to buy Yahoo for more than $44B.  This post is not about that decision, nor does it have anything to do with the circumstances or theatrics of Bartz’s departure.  It has to do with one and only one thing, my own opinion that the decision for Yahoo to exit Search was not a good decision.  Here is why:

In any company, you strike a balance between what you build and what you buy.  Every senior executive and management team struggles with this every day.  No company — not one of the Fortune 500 companies, not the one person startup in your garage — has all the resources to do everything it wants to do or needs to do.  Management must make tradeoffs, sometimes hourly.  Talent is not unlimited, access to capital is not unlimited, time is anything but unlimited.  Management has to decide what it will build and what it will buy.  Will a company hire talent, buy another company, or outsource a task?  These questions never go away, thus management always needs a framework for making these decisions without guesswork or emotion.  Here in a nutshell is that framework:

You in-source that which is strategic — that which is vital and essential and defining to a company’s success in the landscape of its peers.

You outsource that which is tactical — that which is non-essential to the company’s definition in its chosen competitive space

Let’ start with the basics: an intellectual property company — whether technology based, media based, or design based — is a creative company.  That means success begins with an assessment of one’s unique core competency, and that informs leadership through product strategy, not structural adjustment.  Applying unique core competency to product vision drives innovation, forcing a company to determine how it will always be as good as or better than its peer group or competitive circle.   Creative destruction — the continual reinvention of a product or service through ceaseless innovation — begins with the decision not to position one’s output as a commodity, where price rather than differentiation calls the shots.

When Steve Jobs returned to Apple in 1997, he applied a product vision to absolutely embrace the internet through leapfrog design, which was exactly the right move at the right time.  When Eisner and Wells took over management at Disney in 1984 when it was on the verge of a breakup, they applied a product vision to reinvent the company’s product lines through best in class storytelling, merchandising, and delivery mechanisms.  When Jack Welch took over General Electric in 1981 and decided he wanted to exit small appliances, he applied a product vision to become a market leader in industry leading medical equipment and aircraft engines.  In all three cases, it was product strategy — knowing what to keep, knowing what to dump, and knowing what to pioneer — that led to unparalleled success.  They did not outsource their winning moves, they owned them.

The turnaround at Yahoo after the refusal of the Microsoft buyout offer was positioned broadly as structural adjustment.  I am sure there were inefficiencies at Yahoo like there are in any big company, but if you solved all those and added no product vision, it really didn’t matter what you solved.  You would have a more efficient machine that produced less visionary work.  That is not a growth company with promise.  It is a factory.  A factory is not a creative company, it is a factory.

For any “portal” platform, Search is not tactical, it is strategic.  I have heard the argument against this for ten years and it just wrong.  How do I know that?  Look at Google.  Search is their core competency, it is their DNA.  So if Search is strategic for Google and you are competing against them, then how is it tactical?  You may choose to decide you can’t compete with them, which is fine, but if Yahoo was not competing with Google, then who was their competition?  Content companies with big editorial and production costs?  Ad networks?  Telecom?  The problem for the Yahoo employees has been that they were never sure, and the company’s valuation is a reflection of that ambiguity.

Imagine that instead of agreeing to the Microsoft partnership, Yahoo had fought with every fiber of its creativity and gained 3 or 4 points of market share from Google on product respect recognized by the public.  Imagine instead of the mass media branding campaign they did two years ago if they had put all of that money into engineering talent and led a battle cry inside the company to take Search share from Google by improving their algorithms, relevancy correlations, and keyword auction technology while mobile was still nascent.  Would the street have valued that commitment and its promise over the one time benefit of cost cutting and the ten-year forecast baked into their financials of the low delta Microsoft contribution?  Would the employees have given everything they had for the pride of winning, not to mention the potential payoff in their stock options?  Was the Search game so over in 2009, just 15 years into the commercial internet, that walking away from Search when you were still positioned as a top 3 player made sense?

And if you were going to exit Search, where was the company’s core creative focus to be redirected?  Long ago, Tandy got out of leather goods to become Radio Shack, a bold move for its time, but one with a rallying cry.  Yahoo got out of Search, so that people today ask, “What is Yahoo?”

Simple lessons replayed:

In-source that which is strategic, outsource that which is tactical. 

If you exit a strategic line of business, you better have a better one to champion as its replacement. 

A technology company is a creative company.

Creative people have a dire need to build that which is great.  That is what they do.  That is how innovation happens.  Creative destruction is how value creation in legendary companies is sustained.

Yahoo may or may not address this on the rebound, but all of us should take the opportunity to ditch the hyperbole and internalize the basics of identifying and sustaining core competencies that are lasting and cherished.  A brand is a promise.  That promise is delivered not by what you rent, but by what you own.

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5 thoughts on “The Ins and Outs of Yahoo!

  1. Yahoo has never had a defined identity.
    Technology was never their focus, banner ads were where the money came from and to that end they even referred to themselves as a “media company.” In the 90s investors were flipped out about the Internet so they invested in new Internet start-ups and those start-ups used their money to buy ads on Yahoo to get traffic. These companies were a source of revenue so big it blinded them to everything else. And to the companies buying the ads it made good business sense because it was barely a double digit percent of what print advertizing would cost them. Blinded by the revenue stream they never saw how valuable search was; Google was already figuring it out.
    Google, Microsoft and others had hacker-centric cultures. Yahoo thought programming was incidental, software was controlled by project managers and designers; programmers were just there to take the work of these project managers and designers and drop it into code. Because of this, when Yahoo built things, they most often weren’t very good (talk to anyone who had SBC/Yahoo). But their worst problem was they hired bad programmers, and in technology, once you hire bad programmers, you’ve already lost. Without good programmers you won’t get good software, no matter how many programmers you have. And why would good programmers want to work for a company that didn’t have a hacker-centric culture? They didn’t have to go to the extreme, like Facebook, where in the first iterations of the company, they hired programmers to fill positions in HR and marketing. But, the bottom line is that companies that are in the software business need to have good software, and if they don’t they suffer the consequences.
    Given the whole “media company” mindset, is it any wonder it’s in the position it’s in now?
    ZDNet had an enlightening article on Carol Bartz. (www.zdnet.com/blog/btl/carol-bartz-at-yahoo-set-up-to-fail/57545 )
    She did the job she was paid to do. Battling uphill against Yahoo’s identity crisis and its fossilized board of directors she was put between the proverbial rock and hard place. The consensus has been for years that nobody could turn Yahoo around. Looks like they were right.

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