Why Yahoo Could Not Be ‘Great’

The nature of the issue

Successful businesses are of 2 types: Good and Great.

Good businesses generate good results. Great businesses generate excellent results.

But, what separates the Good from the Great?

I think it is:

The ability to sacrifice smaller short-term gains for a bigger long-term gain.

An example of ‘Great’

Zuckerberg was able to take the road less traveled (i.e. the path of bigger long-term gain) when he avoided the short-term temptation of making easy money by putting ads on the Facebook, in its initial years:

Zuckerberg was strongly against imposing many ads upon Facebook’s users. A central element in the movie, more or less accurate, is that Saverin wanted to “monetize” Facebook quickly. He is shown constantly urging his partner to put more ads on the system. Zuckerberg, on the other hand, felt strongly that growing Facebook was more important than milking it for short-term profit. [Source 1]

In fact, Zuckerberg consistently avoided the temptation to resist several takeover offers from a parade of suitors. David Kirkpatrick (the author of the book: The Facebook Effect), writes this about Zuckerberg:

But like many other suitors, the Viacom executives discovered they were dealing with a formidable character. If his invention’s early appeal was at a freshman level, exploiting the desire of college students to check each other out, his professed ambition was much higher: to change the world . [Source 2]

An example of ‘Good’

But what was the case with Yahoo?

Did Yahoo (or its founders) display some of characteristics that Facebook (or Zuckerberg) displayed?

Let us see.

Paul Graham wrote this about Yahoo:

“The big money then (1998) 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… Yahoo’s sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions.” [Source 3]

It appears that Yahoo kept on chasing easy money. Its revenue soared from $717 million in 2001 to nearly $7 billion by 2007.

Terry Semel, who had been the chairman of the Warner Bros., was appointed as CEO in 2001. He turned Yahoo into a highly profitable company that brought old-line advertising to a new medium (i.e. the web). This proved lucrative–but only in the short term.

But the excitement, and the revenue, associated with the big advertising deals ten years ago turned out to be a trap in many ways. Yahoo couldn’t help but to focus on where the big money was, even though that wasn’t where the future was. [ Source 4]

Yahoo ended up being Good because it kept on chasing easy money.

 

 

Yahoo could not become great because it was not able to take the road less traveled and place futuristic bets: like what Google did (on Technology), or like what Amazon did (on Cloud, etc.), or like what Facebook did (on Social graph).

During the years that Yahoo was banking on the media business, Jeff Bezos of Amazon.com, expanded into unprofitable lines of online retail, brooked a painfully hollow stock price, cut workers, and finally spawned a completely different business in the cloud, called Amazon Web Services. At Google, Larry Page and Sergey Brin brought in Eric Schmidt as CEO, inventing an insanely profitable text advertising business that augmented web search results, rather than distracting from them like Yahoo’s eye-ball burning banner ads. [ Source 5]

Moral of the story

Businesses that aspire to be Great, need to often take the road less traveled. This requires sacrificing smaller short-term gains for a bigger long-term gain.

Sources:

  1. How Mark Zuckerberg’s Vision Saved Facebook
  2. Mark Zuckerberg: The temptation of Facebook’s CEO
  3. What Happened To Yahoo
  4. The identity crisis that led to Yahoo’s demise
  5. What Sank Yahoo? Blame Its Nice Guy Founders
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