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. I agree Microsoft got the prize and it is all over for Yahoo. I am looking forward
    to seeing what third and fouth place companies will come up with to compete.
    I just hope to see them survive when Google and MS come knocking on their
    door with checkbook in hand.

  2. @Mike Abundo – I don’t think Google have been thinking of Yahoo as a serious competitor for quite some time – for reasons clearly outlined in this post

  3. Nice post Jason. I think the questions you pose at the end are bad questions. Who got the better/best end of the deal? Depends on what each player thought they had and what they wanted out of the deal. Both sides believe they got the better end of the deal by definition, unless you think yhoo is intentionally underselling itself. So the answer: yhoo and msft each got what it wanted. Each thinks it got the better deal.
    If you include Google in the question, I’d say msft-yhoo gets 1 point of armor class and loses 1 point of agility. For cpc and revenue per search, msft-yhoo will likely experience upticks. Chances are good that in revenue terms, msft-yhoo will gain some share. From a query volume perspective, it’s unclear if this union changes anything per goog. One thing this union will do is decrease the number of search engines iterating. Competitively, in search, if you want query volume share to be changing, you want iterations, innovation and risktaking–as msft did with bing. Ideally, you want yhoo, msft, mahalo, Twitter, Facebook all iterating. Now you have a mini-monolith in msft-yhoo that will iterate and innovate half as much.
    All in, I’d say yhoo realized it wasn’t going to gain share against goog. And you have msft who’s so desperate to be somebody in search. I’d say they got exactly what they wanted. This union will now surrender query market share together because this game as we know it is over.

  4. Oh please. What a silly idea – that Yahoo killed themselves and did not innovate.

    How much more grand to stay in search and fight the good fight and fade into oblivion.
    Clinging to the past one more time.

    By choosing bling or bloing or whatever it is called Yahoo can survive and focus on making money.
    Not spend money inventing old technology hoping to beat Google while they die slowly and painfully.

    You are correct that this could be the end of the old Yahoo – the one that fool Yang
    ran into the ground and filled with sycophants and money leeches. Or you could be
    wrong and this is Yahoo accepting that times are different, al-la America in general, and
    it is time to do what makes money and move on to something new and better.

    Time will tell if this is the start of fighting or the start continuation of dying.

  5. Microsoft got the best of this deal. They’ve been trying to get Yahoo for a while now and it has finally happened. Originally they failed when Google helped them by offering to run their ad server. Unfortunately they squandered their extra profits and didn’t invest in what is important. With Microsoft’s Bing release and Yahoo purchase, it will be interesting to see how the future pans out. The next year is going to be very interesting indeed.

  6. Well, goodbye Yahoo, hello Google. When Bing came out I heard that MS has censored negative information on web pages. If you request a page that was censored you get the censored data, not the original works. Also, I’m not interested in providing more information about my activities to MS. Moved most of my web browsing to a Mac.

  7. Jason,
    It’s 2009. Google and search a big deal for ~8 years. Windows
    has been a big deal for ~20 years and is well past its power peak.
    And, technology cycles are accelerating.

    You’ve bet Mahalo on the idea that search will be important for
    a long, long time. It may not be so.

  8. Well said…! Stop innovating… and you lose your share…
    Precisely this is what happened to Internet Explorer.

    After 6.0 release, Microsoft just stopped innovating IE.
    Result: Microsoft lost much of it’s share to Firefox and Chrome.

  9. Bartz is no dummy…did you guys get the part where Yahoo get 88% of everything…for doing next to nothing?…and they now have a few years to sit back and see where things go, without spending a dime on R&D. Go read about how Carol turned Autodesk from a small, stagnant cash cow into a behemoth.

  10. Excellent article!

    I’m not sure if this is an English saying but in Holland we say: “If two dogs fight for a bone it will probably end up with the third”. I agree completely with how you exactly described this saying. I’m putting my money on an innovative, rebellious and stubborn start up in the long run.

  11. powerset is gone to msft but they can still buy and rescue the sniking ship of Jakia…

  12. I’m hoping this will put some real competition in the online advertising space and force google to give better returns on adsense. If this partnership will lead to more relevant ads being purchased on yahoo/bing I might change my ad provider.

  13. My first take was: Microsoft got the better deal: it’s now a two horse race instead of a three horse race, and Bing gets Yahoo’s users and search advertisers, and the scale and technology to improve bing. Maybe some great Yahoo Search employees as well. After 5 years, MS can set up its own team for selling to premium advertisers, and pay Yahoo lower TAC.

    But mobile’s where the future is, and for some of us, where the present is – India has over 400 million mobile connections, and growing at 10 million a month. Maybe Bartz exited web search to focus on mobile – mobile search isn’t a part of this deal. The battle with Google for the mobile hasn’t been decided yet, but I’ll be surprised if the Yahoo mobile homepage assumes the dominance that the web page has.

    Overall, MS got the best of this deal

  14. What a wonderful insight. I agree that the talent that Yahoo
    commands, they could have given fight..

    P.S. @Jason, you can start innovating right here on your blog
    by using black color font.

  15. Microsoft played the right cards on this. Yahoo really boo boo it at the end of the poker game. playing bluff but not able to get it right.

  16. You’re nuts to think that search is the most important business of the 21st century – seriously you are.
    Sustainable energy products and services and finding renewable sources is will to do more to balance the lives of billions and ensure we all have some kind of future.
    Whats the matter – are you still sore from back in the netscape days?

  17. Mike, there’s Twitter, Mahalo, Facebook, …
    They aren’t attacking Google head on but I wouldn’t rule them out and say Google now has just one competitor to think about.

  18. @Borislav: folks can always put in things to *compete* with them. But there’s competition and then there’s competition. A fly watching two buzzards devouring a carcass isn’t really competing with the buzzards, but might get eaten by them. The cost of switching people over – making them change habits – is absurdly high. Ask Microsoft. After spending a possibly vulgar sum on promoting bing (cash give-aways, advertising, the works), they went and inked this deal with what appear to be decent TAC terms for Yahoo.

    @Jason: Agree 100%. This feels like a deal that Yahoo did because they had to show they were doing something to get focused again. Is getting focused on content the way to go though? What’s the entry barrier to content? One other memo that doesn’t seem to’ve gone out is that it’s not one mega-content site that’s the competition… it’s dozens of highly specialized startups and/or content companies that will eat away at Y’s market share in their respective areas. Content habits are way more fickle than search habits.

    – Varun.
    Founder, HomeCamera

  19. I arrived here via Google Reader and was not going to comment
    until I saw Dave’s comment.

    He is right, your text is a very faint. I had to highlight the
    text to read it comfortably.

  20. Dude you write like a schoolkid thesis – microsoft is so not infallible – encarta was so ill timed and nuked by free wikipedia, zune is a joke, and hasta to vista. Even bill has already left the bldg

    These two are hanging onto each other like caprio and kate in titanic

    Sure, one will drown but neither’s going home in the ship they headed out in

  21. I am huge fan of innovation too, but things are not in
    black and white. Just a few examples:
    – ICQ was innovative, but YM took the pie
    – metacafe was innovative, but youtube hit the jackpot
    – classics Apple/Microsoft (mouse, windows interface, etc)
    I am sure others are there…

    So: innovation is great, but execution is what makes
    the difference

  22. With Twitter’s repositioning as “real-time search”, and search becoming a two-dog race, both Google and MS must be salivating to buy Twitter. I wouldn’t be surprised if either of them layed down 1+ Billion to get ahead under these circumstances.

  23. Pingback: Yahoo Got Binged
  24. This is a really beautiful argument.

    It’s been sad watching Yahoo go downhill. I’ve been having daily problems with logging into my yahoo email for weeks, if not months, and some unexpected problems with their webhosting as well.

    If they can’t innovate and they can no longer provide solid basic services then it’s all downhill from there.

  25. I’ve read about a dozen or so articles and blog posts on this coup but you have single handedly summed t up the best… kudos! It makes me think of the scene in the movie where Noak Wiley plays Steve Jobs and the guy from the Breakfast club plays Billy Gates where he realizes who the real “enemy is. Sorry, can’t remember the name of the movie. You have to watch Microsoft and learn from them, not just hate and dismiss.

  26. I think this deal is pretty irrelevant compared to the hype. Yahoo was decomposing long ago. And even though msft is a behemoth overall, they are an underdog in search and are making the classic mistake of trying to fight the giant head on….in search they are david, and google is goliath (

    This is the fundamental flaw with BDCs, they are culturally and structurally incapable of acting as challengers in new growth areas due to success in other businesses. The next wave of search is clearly going to be leveraging personal/social data to make a better experience…….smart companies go to where the ball will be, not where the ball is….i guess this is why start-ups exist 🙂

  27. As an ex-Yahoo who worked on the search advertising side, I couldn’t agree with you more. Yahoo has continuously made the wrong moves on search, from failing to acquire Google when they had the opportunity, to constantly underinvesting in all things search, and now giving up on it altogether. I think the only right move was the acquisition of Overture, but they failed to play that out properly.

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