Yahoo committed seppuku today

Yahoo committed seppuku today.

The once proud warrior of the internet space laid down its sword,  knelt at the feet of Microsoft and gutted itself today. There was no honor in this death, it was one brought by the shame of losing to  Google and a lack of faith in one’s ability to compete in the space they created. To be clear, Yahoo didn’t need to do this deal,  Microsoft did. Ultimately Yahoo will look back at this moment as the second–and perhaps fatal–mistake in their epic history.

Search is the most important business of the 21st century and owning a  commanding lead in second place is not insignificant. At one time Yahoo was the number one search engine and portal. However, they  didn’t see the value in search and decided to syndicate that piece of their business to a small company called Google. For a couple of years  we all experienced Google in Yahoo’s wrapper. Our only indication of who made this wonderful tool was a tiny “Powered by Google” logo on the top right of the page.

We noticed and we learned. The thought leaders went directly to Google  and dragged everyone but the laggards (Yahoo’s current 20% market
share) with us. Yahoo accelerated the ascent of the master. Had Yahoo  not given their search franchise over to Google back then, there is a good chance that the race for the most important business of the 21st  century would be a dead heat. Certainly it would be closer.

Today, with their Microsoft deal, Yahoo again undervalues their search asset. Again, they will be “Powered by…” and again they will destroy their brand and its value.

All that being said, Microsoft’s obsession with taking Yahoo’s second  place position and adding it to their 3rd place position is not an indication that it’s time to sell. Far from it. When Microsoft is  interested in a space it is a clear sign that you should be investing in it–not selling it.

Microsoft’s deep dive into a graphical user interface on an operating  system, Windows, was a clear sign to Steve Jobs that his bet was correct. Steve doubled and tripled down and that is why Apple is  Apple. Microsoft’s deep dive into word processors and spreadsheets was the clear sign to WordPerfect and Lotus 1-2-3 that this was a space worth fighting for.

Microsoft’s massive investment into video games, mobile operating  systems and search are clear indications that Sony’s Playstation, Google’s Andriod, the iPhone, Google and Yahoo are very important companies.

Nintendo didn’t give up when Microsoft came into the video game  space–they innovated. Now the Wii outsells the mighty XBOX 50 million to 30 million. That is how you fight Microsoft: you innovate. Steve Jobs knows this, Nintendo knows this, and Oracle knows this. Yahoo, apparently, did not get the 40-year-old memo.

Aggression and innovation wins. Period.

To say it clearly: Microsoft does not enter a market unless it’s  important, huge and on the way to becoming even bigger. Microsoft is the buy sign, not the sell sign. The people at Microsoft are brilliant and not to be underestimated–history has shown this to be true.

The Right Move
The proper move when someone wants something you own badly is to  invest more in it. “Oh, you like my house and you’re willing to pay double what I paid for it? Did I mention I just redid the kitchen, bought the lot next door and put in a newHVAC system?” How much is it worth to you now? That’s gangster CEO-level poker playing. You raise and raise while you develop your hand and increase its value.

If I was the CEO of Yahoo I would have bought Powerset and five other  innovative search-related startups in the past three years, taken bold steps to innovate in search design and spent $100m in marketing the service.

Oh wait, that’s exactly what Microsoft did! Zing! Pow!

What did Yahoo do instead? While playing tough guy with Microsoft’s  war chest of money, debating $31 or $33 a share, they took their eyes off the prize and stopped innovating. The founders ofFlickr and  Delicious left, Yahoo’s once promising think tank was shut down, the products didn’t advance and all the cool kids left. What a disaster.

While Rome was burning in Sunnyvale what did Microsoft do? The opposite: they invested in search, hired the cool kids and gave Yahoo, their shareholders and the public one very clear message: Yahoo is dying on the vine, incompetent and we’re solving the problem. You can sell to us or get run over by us. What did Yahoo do? They took a page out ofTimeWarner/AOL’s handbook and brought in someone who had never worked in the consumer internet before to clean up the mess.

[ Note: I’ve never met Carol Bartz so I can’t speak to her abilities. Clearly she is a very competent deal maker and operator. However, she’s not in the league of the growing “product genius” Google cabal of Larry, Sergey,Marissa, Chad and Salar. ]

Yahoo’s shareholders should be in full revolt right now, but the truth  is the shareholders of Yahoo lost faith long ago. From the Yahoo  shareholders I’ve talked to over the last couple of years–and I’ve met the big institutional ones who own large chunks of it–they want to get the best possible price out of Microsoft and move on. They were  tired of the war and thought gutting the pig and selling the pork was better than building a farm. Well, maybe that isn’t the best analogy in the world, but I think you get my point: cut it up and ship it out. We’re done here.

Round Three
And so ends the second chapter of search and begins the third.

Chapter one was inception up until the launch of Google.

Chapter two was Google’s rise and Yahoo’s death.

Chapter three will be the two-horse race of Microsoft and Google, with the inevitable emergence of a third and fourth player.

That’s the silver lining for startups in all of this. As Google and Microsoft lock into a dog fight for revenue and market share, leaving the Yahoo carcass on the side of the road, the bevy of crafty startups will get their chance to take the third, fourth and fifth positions in this very important race.

The lesson for all startups–and BDC’s (big dumb companies)–is that innovation is all you have. Once you stop innovating you lose your talent and you lose the race. Never. Stop. Innovating. Never. Never. Never.

Man I love this game.

Question: Who got the best of this deal and why? (replies are considered ok for reposting unless you say “not for republication” or “ok to republish, just don’t attribute to me”).

all the best,

Note 1: To unsubscribe hit reply and put unsubscribe in the subject line.

Note 2: Sorry for the delay in getting you a newsletter. I’ve had some major life events go down recently and I’ve been suffering from massive writers block. Perhaps today will open the flood gates up again.

Note 3: If you haven’t  tuned in to This Week in Startups it is going well, we’ve done almost ten episodes.

Note 4: Thanks to C.K. Sample for the last minute edit.

141 thoughts on “Yahoo committed seppuku today

  1. this is about monetizing the search /content hybrid for the living room. Ad $ that
    hybridizes television ad $ bohemoth with goodle’s adsense.
    There is a good chance EVERYONE outside of Microsoft and Yahoo should be scared.

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  3. Why is this a surprise? Yahoo is a Jack of all trades and a master of none. They purchased Overture in a true steal and buried that business. At least they had the common sense to make that purchase. What a huge joke this is – innovate? I think only weather widgets and emoticons.

  4. “The once proud warrior of the internet space”
    investors are rarely innovative developers, and this decision
    not made by young skater/surfer/developers but by nice old
    Balmer kind of guys, so naturally taste like that,
    in terms: obey, strategy, calculate, alliance,
    loosing dignity, loosing integrity…………only one fruit:
    money…….innovation “~0”

  5. Google is making all that money because they’ve become the digital Yellow Pages. Message to competitors: don’t try to be the second-best Yellow Pages. You already missed the boat. Try to be the digital White Pages. Oh wait – Facebook’s already done that. Find the next thing that isn’t being done well.

  6. Technology companies can only be successfull with strong
    technology based leadership. A marketing deal like the
    Microsoft / Yahoo combination will not have the innovation
    required to succeed in a competitive market. Google will be
    profiting from this deal and maintain its leading position.
    Small new upstarts will emerge, most likely by people leaving
    Yahoo, and take the other parts of this emerging market.
    Likely participants will be existing publication houses, looking for
    new opportunities.

  7. ” the most important business of the 21st century “, that’s a bold statement, considering the century just started.

  8. Brilliant Post … but let’s also think INSIDE the box for a
    minute. Yahoo had so many opportunities – a brilliant desk top search that they dropped for an outsourced solution that has never worked properly for me, failure to ensure that synch for contacts, tasks and other data was a priority and worked properly. Leadership squandered in the very small business information that google is now moving into. Their contacts were always bookmarkable so they could be hyperlinked to company records and tasks in non yahoo products. But where was the Yahoo integration. It’s been so hard to stay a loyal customer – they didn’t drop just one ball, they seemed to lack strategic focus. Inevitable but sad.

  9. Jason – this is a great post.

    I agree that we are only scratching the surface in terms
    of the future of search.
    And this leaves plenty of business opportunities for
    Mahalo and other great search oriented companies and

    One of my own observations is that a Google search is not good at
    finding images on flickr and a Yahoo! search
    rarely finds videos on youtube. How come?

  10. Hi Jason,

    Your article is pretty interesting for a non-product audience and from an high-level strategic perspective.
    But if your lesson makes sense in the context of your article, you really need to understand that people don’t embrace the Yahoo! brand to search, and this even more true outside of the US. That’s why, investing or not on search, Yahoo! search is not gaining any market share.
    Search is not the Yahoo!’s value proposition since more than 6 years, if we can regret the past move to not have acquired Google, this is not the same story today. Isn’t fair to decide to focus on what your brand do for people while keeping 88% of your revenues and removing most of the costs?
    You base your analysis on the assumption that bing integration will be as the google one.
    Maybe you’re wrong here.

    Again it’s a nice article, but I think it’s pretty early to what is coming out of this.
    Cause what you ask at the end of the day is to make Yahoo! a search company first, which means killing what the brand stands for in the eyes of 51% of the global Internet population.

    Wouldn’t it be the biggest marketing mistake ever?

  11. I love poker analogies to investing (just like Fred Wilson!).
    It looks like while Yahoo had the better hole cards (a big
    head start and huge audience), the flop favoured Google
    (the web got really big) and Google bet well (invested sweat
    and money on better search technology). However, the turn
    and the river are yet to come between these two, and let’s
    not forget the other player at the table, who came along
    with a gigantic stack and hasn’t played too well so far but
    hasn’t mucked its cards yet…
    – Microsoft. We should keep watching this game!

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