The Yahoo! Story

The fall of an internet giant

Yahoo! could have easily been the biggest internet company in the world today. At some point, it actually was. In the late 90’s and early 2000’s, Yahoo! had a market capitalization north of one hundred billion dollars. Adjusted for inflation, that would be a huge sum of money. Yahoo! is also a symbol of bad business decisions and poor corporate management, but let’s not get ahead of ourselves.

Beginnings

Founded in 1994 by Jerry Yang and David Filo, it was never intended to be a business, or so the founders claimed. As the internet era was being ushered in the early 90’s, finding information on the internet was a very herculean task. There were no search engines in existence then, so you had to know the names of every website you loved to gain access to the site. How big the internet was for you was a function of how many websites you could remember. As a side hobby, the two co-founders, who were also students at Stanford University, created a web directory of their favourite websites. Soon they were sharing this directory to their friends, who discovered that it made web surfing relatively easy. Their friends shared to their friends and so on, and soon, the traffic they were gaining to their site was becoming enormous, and they probably thought, “Hey, we should turn this into a business.”

They met with Silicon Valley venture capitalists who were willing to invest money into the venture, and the growth was exponential from then on. More services were added, and you could spend a whole day on the internet without leaving Yahoo!’s homepage. Yahoo! wasn’t just part of the Internet; it was the Internet.

Spurred by the startup mania of the 90’s and the dot.com stock market bubble of the late 90’s, Yahoo! grew at an unprecedented rate and, in January 2000, reached an all time high valuation of $125 billion dollars. But things were never the same after that.

The Downfall

As the internet got bigger, the number of websites that were being created also got bigger. It was becoming increasingly difficult for Yahoo! to maintain a list of all the websites on the Internet. Around 1998, two Stanford University students were working on a search engine that could index all the web pages on the internet and present to the user the most relevant information she is looking for, without the user having to go through a bottomless list of web directory. Those two young students were Larry Page and Sergey Brin, and the company they would later found was called Google.

Google was actually started as a PhD project, and the founders did not really have any intention of creating a company per se, more so the behemoth Google is today. Early on, the founders of Google offered to sell the company to Yahoo! for a paltry one million dollars. Considering how big Yahoo! was, they could have spent that money without blinking. But they turned down the offer.

Soon, Google was gaining more traffic than Yahoo! because, obviously, it was more convenient to use. Other startups started springing up too, which were outperforming Yahoo! in their various ventures: PayPal replaced Yahoo! Pay, Gmail replaced Yahoo! Mail, Amazon was replacing Yahoo! Shopping, and so on.

In 2002, Yahoo! had another chance to pick up Google for $5 billion, but insisted they would pay only $3 billion, and so passed on the offer again. Of course, they could have made the purchase if they wanted to. Around the same time, they were already on a startup acquisition spree, picking up even some useless startups that never made it past the dot.com bubble. Earlier, Yahoo! had paid a whopping $5.2 billion for Mark Cuban’s broadcast.com, whose service today has been discontinued.

Anyway, Google’s growth continued and Yahoo!’s downfall continued, too, and the story only got worse.

Bad Decisions

In 2004, a 19-year old Harvard student was working on what would later become the largest social media empire in the world — Facebook. Like Google, Facebook’s growth was exponential, and within months, they already had millions of users. It was not long before Yahoo! started courting Facebook to acquire the company. Mark Zuckerberg, Facebook’s founder, didn’t want to sell, but Facebook’s board of directors insisted he would have to if Yahoo! offered a billion dollars. On the day of the deal, Yahoo! insisted that it could only pay $850 million, and the deal didn’t go through. There are conflicting stories about this — in his 2017 Harvard commencement address, Zuckerberg claimed he outright refused to sell Facebook from the start. Whatever happened, we know Yahoo! never bought Facebook.

As more startups outdid Yahoo!, they continued on their slippery slope. Then, in 2008, another tech giant, Microsoft, offered to acquire Yahoo! for more than $40 billion dollars. Trust the board of bad decision makers, the offer was turned down, because Yahoo! thought Microsoft was underestimating its potential.

The financial crisis of 2008 gave the last blow. Yahoo!’s stock kept falling, and in 2017, they were finally acquired by Verizon for $4.5 billion, less than a tenth of what Microsoft had offered.

As of writing, Google is worth almost $2 trillion, and the company Zuckerberg founded, now called Meta, is worth more than $500 billion dollars. Imagine how big Yahoo! would have been if it actually acquired Facebook and Google. We would probably make our searches on Yahoo! search, watch YouTube on Yahoo! videos, etc.

To be fair, it was not possible to have known these companies would be big. At the time, they were just another startups, and there were hundreds of them at the time, so if was just not possible to have known how much potential they had at the time.

Yahoo! still gets some traction even today, and they have very valuable services such as Yahoo! Finance that displays stock prices and company finances, Yahoo! mail for email services, and so on. But its story is a caution for business owners on how critical decisions and complacency can destroy a business.