2. Has Yahoo! permanently lost the battle to Google? Can Yahoo! reinvent itself? What strategies would you

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Question:

2. Has Yahoo! permanently lost the battle to Google? Can Yahoo! reinvent itself? What strategies would you recommend?

3. What steps can Yahoo! make to realign its business model?

4. To what extent is Google’s competitive advantage sustainable?

Case:
The case describes the rise of Yahoo! as one of the most popular portals on the Internet and its business model challenges today. It averaged over 144 million page views per day in 2006, when it earned $2 billion on revenues of $6.4 billion. Moreover, its share of the search engine market had plummeted dramatically from over 30% to around 12% while Google search increased its share to a whopping 65%. The result of these changes was that in 2011 Yahoo!’s stock price averaged around only $15-it had lost over half its value in the last five years. In 2011, Yahoo! employed over 14,000 people. It was founded by David Filo and Jerry Yang, two Ph.D. candidates in electrical engineering at Stanford University who wanted a quick and easy way to remember and revisit the websites they had identified as the best and most useful from the hundreds of thousands of sites that were being added on the WWW in the early 1990s. As others began finding their categorization useful to navigate the Web, traffic on their site grew rapidly and Yahoo! became a portal of first choice. While other sites (such as Alta Vista) had also emerged to simplify web navigation for users, the virtue of Yahoo! was that its human-powered search engine had already done the legwork for ordinary Internet users; it listed sites handpicked for their usefulness, and at this time these web crawlers could not match its relevant results to user queries. With Yahoo!’s popularity, its value as Internet real estate also grew, since companies were willing to pay to advertise on such a heavily trafficked site. Yahoo!’s business model was based on generating revenues by renting advertising space on the pages of their fast-growing web directory. When a user clicked on an ad, this “impression” as it is known became a charge to the advertiser’s account; in general, the more impressions the more the advertising fees.

To expand further, the founders took on venture capital, and hired some professional managers. First, Tim Koogle, an experienced Motorola executive, was hired as the CEO of the company. The new team devoted more attention to developing the marketing and advertising competencies of Yahoo!. Second, Yahoo!’s business model was replicated in eighteen other countries of the world. Yahoo!’s success with its global operations convinced Koogle to craft a new vision of Yahoo! not as an Internet website directory but as a global communication, media, and retail company whose portal could be used to enable anyone to connect with anything or anybody on the Internet. Yahoo! worked with advertisers to enhance their sites. They also improved the online shopping experience to direct more traffic to online stores through its sites-thus increasing the value of its site as the gateway to the Internet. Koogle’s new strategies revolved around making Yahoo! a megabrand by becoming the most useful and well known web portal on the Internet. Not only was Yahoo! focused on improving its web directory, it was also concerned with creating compelling news and entertainment content by adding more and more new services and features. In turn, this would increase its value and appeal to web users and encourage them to register on its website. Aiming to lock in users and increase their switching costs of turning to a new portal, Yahoo! often acquired well-known Internet companies to increase the value of its portal to users. Most of the services were provided free to Yahoo! users because the advertising revenues were highly profitable. Yahoo! received additional revenue from the fees it earned by joining sellers and buyers on its shopping and specialized retail sites.

In early 2000, it seemed that the company could do no wrong. But within a few months, its market value had collapsed from US$220 billion to US$10 billion. Only part of this drop could be attributed to the Internet bust of 2000. Koogle’s strategy relied heavily on advertising dollars. As the Internet boom collapsed, advertising revenues plummeted as well. Furthermore, many of the acquisitions seemed overpriced in retrospect-overpriced to the tune of billions of dollars. At the same time, general advances in Internet technology lowered the value of the acquired companies’ distinctive competencies and their competitive advantage in providing a specific online service-the main reason why Yahoo! acquired them. Technological advances were making it easier for new upstart dot.coms to provide similar kinds of specialized Internet services, but with a new twist or killer application. The new upstart companies directly siphoned off users from Yahoo! sites-users who no longer needed Yahoo! to find what they needed. Yahoo!’s portal had become too generic and therefore less valuable to users.

Google delivered the ultimate shock to Yahoo! by providing a better, more relevant search engine. Google’s revenue model for online advertisers was also superior since it delivered more relevant customers to advertisers’ sites, and therefore increased the value of their advertising. In other words, it offered a pay-for-performance model to advertisers that was overall a better value to them, as well as to Koogle. In 2001, Koogle was asked to step down from the board, and Terry Semel, an experienced media executive, took charge. Semel’s strategies have focused on improving Yahoo!’s content internally as well as via acquisitions, delivering a Google-like advertising revenue model (pay-per click). Yahoo! is using its new acquisitions and internally developed skills to give each of its hundreds of services a more customized, social-network-like appeal to users. In the summer of 2006, however, major questions arose regarding how much Yahoo!’s content-driven strategy would continue to drive its revenues as competition, particularly from Google and social networking portals increased dramatically. Ironically, it was Google that once used to power Yahoo!’s search engine on contract. Gradually Google developed enough content, and enough user loyalty, that users began to bypass Yahoo! to use Google’s website directly for their searches. Semel's belatedly tried to catch up by buying Inktomi and Overture, other search engines that Yahoo! was familiar with. But Google was too fast and nimble for Yahoo! and sprinted ahead.

One of the big planks of Semel’s strategy was an overhaul of Internet search technology. To meet Google’s challenge, Semel's combined the distinctive competencies of Inktomi and Overture with the in house technology developed by all Yahoo!’s search engine and advertising software engineers to develop an improved search engine that would lead to a much improved customized online advertising program. Yahoo! began a major technology upgrade, Project Panama, to improve its search-based advertising technology with a goal of bringing the new system online in 2006. But, this massive project soon fell behind schedule, and the company could not meet its revised goal of launching it in the summer of 2006, which is one of more reason for the company’s 38% slide in third-quarter revenues and its fourth-quarter profit warning.1 In addition to trying to increase revenue, Yahoo! is also trying to reduce its cost base, with some retrenchment and reorganization.

Yahoo! has kept on steadily losing ground to Google, especially in Internet advertising. In 2005 Yahoo! and Google were neck and neck, both with roughly 18% of Internet advertising revenues By the end of 2006 Google’s had grown to 25% and Yahoo!’s had dropped to less than 14%. The stakes are high for soaring Internet advertising, and the $16.7 billion spent on it in 2006 is expected to grow to 29.4 billion by 2010.

By 2008, for example, mobile video was a killer application and to compete with Google Yahoo! had invested heavily to upgrade this service but eventually Yahoo! was forced to shut down its video service to cut costs. The problem for Yahoo! was that its cost structure was increasing and it had lost its first-mover advantage to its new rivals-not a good place to be in the fast-changing online world. New CEO, Jerry Yang, streamlined Yahoo!’s business model by prioritizing the importance of its vast array of online services, improving its search and advertising competences, and reducing its workforce to cut costs.

Yahoo!’s stock continued to fall so much so that in late 2008 Microsoft announced that it wanted to acquire Yahoo! for $40 billion. Yang whose resistance to the merger had personally cost him billions of dollars decided that his future as CEO looked bleak and he handed over the reins to former Autodesk CEO Carol Bartz who became Yahoo! CEO in January 2009. Bartz’s cost-cutting efforts helped Yahoo! satisfy investors when in the Spring of 2009 she announced plans to cut 5% more of Yahoo! staff, on top of 1,600 job cuts that had been made in December 2008. Yahoo!’s stock price rose 5% in the middle of 2009.

In 2009 Yahoo! and Microsoft announced they had formed a strategic alliance that would benefit both companies in their battle with Google and Facebook. Yahoo! agreed to outsource its back-end search functions such as web crawling, indexing and ranking to Microsoft to save money and use its Bing search engine to enhance its competitive position. In exchange, Yahoo! agreed to pay Microsoft a commission for paid search ads sold on Yahoo! and Yahoo! partner sites. Yahoo! estimated that this alliance would boost its annual operating income by about $500 million and reduce costs by about $200 million. In June 2011, Yahoo! announced some disappointing results, in the most recent quarter its revenues had dropped by 23% compared to a year ago while Google announced that its revenues had increased by 32%. In the past year, Yahoo!’s 14,000 employees had generated $5.6 billion in revenues and $1.2 billion in profit while Google’s 29,000 employees had generated $33 billion in revenues and $9 billion in profit. It was evident that Yahoo! had not obtained the potential benefits it had expected to receive from its deal with Microsoft, and Yahoo!’s targeted display advertising business had not performed as well.

In light of this, Yahoo! could now deliver its content and ads on all kinds of mobile computing devices, not just desktops and competition from Facebook and Google had investors worried. Yahoo! stock continued taking hits after posting lower revenue expectations and well-publicized company spinoffs, In August 2011 Yahoo!’s market value was about $18 billion, and two-thirds of that value was made up of its Asian assets valued at $9 billion, its $3 billion in cash so what was left was Yahoo!’s global online assets now valued at around $6 billion

Yahoo! analysts could not decide if Yahoo! was undervalued because its online properties still offered the possibility of generated substantial revenues from search and advertising revenues. Or, if its value might decline further in the future because it now had given up its online search expertise to Microsoft; it could not counter the strategies of Google and Facebook; and there was still no pipeline of innovative products to attract new users.