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Yahoo: a textbook case of how not to run an internet company

It was once the "go-to" site on the internet. Now Yahoo is basically a laughing stock.

Today the fallen internet giant announced another reorganisation of its business. It is going to cut costs, fire 15 per cent of its workforce and try to sell itself, if it can find a buyer. (A spokesperson from its local operations, Yahoo7, which is a joint venture with Seven West Media, said: "The recent Yahoo announcements will not affect our 2016 strategic plan or local team.")

Terry Semel also committed one of several massive missteps: missing a chance to acquire Google.
Terry Semel also committed one of several massive missteps: missing a chance to acquire Google. Photo: Damian Dovarganes

In any case, with a new boom in start-ups under way in Australia and abroad, and conditions looking frothy, Yahoo's sad, slow decline could provide today's internet entrepreneurs with some valuable lessons.

Where did it all go wrong?

Yahoo's embattled chief executive Marissa Mayer.
Yahoo's embattled chief executive Marissa Mayer. Photo: AP

Here is a brief history: Yahoo began in the 1990s as a directory of sites on the early world wide web. It then morphed into a portal, a kind of starting point where people could find what they needed on the internet. But its model was quickly rendered obsolete by Google's algorithm-powered search engine, which enabled people to find things on the web more easily and quickly (and which had a much stronger advertising model underpinning it).

Yahoo ended up licensing Google's technology and then Microsoft's Bing to power searches on its properties, in effect accepting that it was a not a search company but a content company and destination with a lot of traffic. Evidently, that hasn't worked out particularly well.

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The amazing thing is that Yahoo, in 2003, reportedly had the chance to buy Google for $US5 billion, two years before its IPO. But Yahoo's chief executive at the time, a Hollywood executive called Terry Semel, wasn't prepared to pay more than $US3 billion for what then was still a start-up, according to the reports.

I'd argue Yahoo is a classic case of the phenomenon we discussed this week – for whatever reason, great tech companies tend to be run by strong founders. Yahoo seems to have suffered from a lack of a dominant figure with a clear vision for the business. It has had a succession of chief executives over the years. They include co-founder Jerry Yang who admittedly secured a highly lucrative investment in Chinese internet giant Alibaba, as well as the aforementioned Semel, Scott Thompson (who was pushed out amid a  résumé scandal) and current boss Marissa Mayer. The frequent leadership changes have meant constant changes to strategy and direction of the business.

The company does not have a dominant shareholder, either. That has meant its institutional shareholders, often impatient, have arguably influenced some questionable decisions made over the years, including plans to save costs by outsourcing search.

Contrast Yahoo's situation with Facebook. The social media giant paid a staggering $US19 billion to acquire WhatsApp in 2014 – effectively eliminating a potential competitor before it really got started. WhatsApp had precisely zero revenue at the time and just a handful of employees, but it was starting to amass a pretty substantial base of users that could have ended up threatening Facebook. Facebook, of course, is controlled by its founder Mark Zuckerberg through a dual-class share structure.

The rise and decline of Yahoo will no doubt be studied in business schools, if it's not done already. And there are at least two lessons for today's entrepreneurs from its continuing struggles: never underestimate a threat, and try not to give up control of your business.

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