March 2, 2005
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David Filo remembers the days in 1994 when he and fellow Stanford University doctoral candidate Jerry Yang would get together with friends to conjure up big ideas for making a business out of the Internet.
By Jim Hu
The group batted around ways to sell goods through the emerging medium, but most of the ideas were scrapped. After the meetings, Filo and Yang would retreat to a trailer behind a computer research building on campus and work on a side hobby that they named "Jerry's Guide to the World Wide Web," a Web search directory that would change their lives. A year later it would be incorporated as Yahoo.
From hobby to commercial Web search directory to online media powerhouse, Yahoo has endured many changes during the past decade, riding a largely serendipitous wave to emerge as one of the most successful progeny of the dot-com boom. Survival has brought sweet rewards in the form of booming revenues and profits, and a surging stock price.
Although insiders say it's no longer de rigueur to throw things against the wall just to see what will stick, the Web portal that wants to be everything to everyone is still very much in exploratory mode.
"We never thought about Yahoo as one of those ideas," Filo said in an interview in advance of the company's 10th anniversary Wednesday. (Co-founders Filo and Yang now both go by the title of "chief Yahoo.") "We weren't thinking of Yahoo as a business."
Of its myriad businesses, Web search is the standout, delivering a significant portion of the company's $3.6 billion in revenue last year.
Unlike rival Google, however, Yahoo is resting its strategy on a full service approach, delivering as much of the Web as it makes sense to offer to as many people as possible. Its dizzying array of offerings run the gamut, from online job listings to music videos to online dating services, news, financial tools, instant messaging and Web-based e-mail, just to name a few.
Much of today's most popular services were built during the go-go years in the 1990s, when building audience was the company's objective. The sense of idealistic entrepreneurialism was also infused throughout the company in its early days.
"I think we all believed we were going to change the world, and I think we did," said Ellen Siminoff, a former senior executive at the company who is now CEO of Efficient Frontier.
Despite that success, it's no secret that Yahoo CEO Terry Semel sees search revenue as a means to develop new products and services. Although it's not certain what those might be, the goal is crystal clear: Boost ad sales by keeping Web surfers on Yahoo's services longer.
"Semel has now built the economic base that empowers him to be more adventurous to move Yahoo towards being an Internet media company, whatever that turns out to mean," said David Graves, a former senior executive at Yahoo and currently CEO of NetcableTV.
Even if Yahoo is still improvising its next moves, former employees say there is no mistaking the current operation with the freewheeling days of the past.
Yahoo in its early years operated on the philosophy that if you build it and it gets lots of clicks, keep it running. This mentality fostered what most former Yahoo employees interviewed for this report described as a bottom-up approach to growing it business. Employees were expected to foster new ideas, test them and then launch them.
"People had a lot more rope to go out and do more innovative things," said one former Yahoo executive who requested anonymity. "The downside was you didn't coordinate with the rest of the company, and nobody was holding a central road map."
Yahoo grew quickly, rushing toward an IPO in 1996 that accelerated the dot-com boom when its stock exploded on the first day and soared straight up from there. Revenues also began pouring in, jumping from $19 million to $1.1 billion by 2000.
But by 2001, there were signs that the age of innocence was coming to a dramatic end. The dot-com stock market crash in 2000 resulted in an overall drying up of venture capital money, the main source of funding for the swarm of Internet start-ups trying to go public. The ripple effect eventually hit Yahoo, which attributed most of its advertising revenues to exclusive deals with venture-capital-flush dot-coms.
Changing faces
Facing disenchanted Wall Street analysts, skeptical reporters and a stock price heading toward an all-time, single-digit low, Yahoo CEO Tim Koogle resigned. The board brought in a controversial replacement--Semel, a former studio head for Warner Bros. who had never served as CEO of a publicly traded company and had no high-tech experience.
While Yahoo's success was built off the backs of Yang and Filo's search directory, search eventually would come back to haunt the company. In June 2000, Yahoo agreed to use Google's Web search technology in its own search engine. Five years later, Yahoo has paid a heavy price for Google's ascension. Google has entered into many of Yahoo's businesses, such as free e-mail, and Google remains Overture's biggest competitor in paid search.
Last quarter, Google reported $1.032 billion in revenue, just shy of Yahoo's $1.078 billion.
"Search was a focus of the company, but we white-labeled Google and called it a day," recalled one former Yahoo executive who spoke on condition of anonymity.
Semel's seminal move, many analysts believe, came in 2003, when Yahoo acquired Overture for $1.7 billion. Since acquiring the company, Yahoo watched its revenue soar from $1.6 billion in 2003 to $3.6 billion in 2004.
"The question for Semel's first year and a half was how to fix it," said NetcableTV CEO Graves. "Paid search fixed it."
Yahoo's future could reside in new areas of growth that are harder to break into for competitors but which are much closer to Semel's expertise. Earlier this year, Yahoo signed a lease to take over a sprawling office park in downtown Santa Monica, Calif., in anticipation of moving most of its content and entertainment operations into the area.
The company has struck deals with major entertainment producers such as Mark Burnett of "The Apprentice" and "Survivor" fame, along with exclusive rights to distribute two animated films from JibJab. Both deals were lead by Jim Moloshok, a former Warner Bros. executive brought in by Semel to strike deals with Hollywood studios.
The company also hired former ABC executive Lloyd Braun to head all of Yahoo's media and entertainment properties. The hiring was considered by observers as another step for Yahoo to become an online entertainment player, opening up the possibility of creating their own content one day.
Despite all of these changes, despite all the ups and downs of the stock and its revenue, Yahoo believes its roots remain the same.
"We never lost sight that what we knew from our media background is that advertisers ultimately follow the eyeballs," Dan Rosensweig, Yahoo's chief operating officer, said in an interview.
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