Yahoo's identity crisis led to its demise - a decade in the making

San Francisco

WHEN senior Yahoo executives gathered at a San Jose hotel for a management retreat in the spring of 2006, there was no outward sign of a company in crisis.

The Internet pioneer, not yet a teenager, had just finished the prior year with US$1.9 billion in profit on US$5.3 billion in revenue. The tough days of the dotcom bust were a distant memory, and Yahoo Inc - flush with lucrative advertising deals from the world's biggest brands - was enjoying its run as one of the top dogs in the world's hottest industry.

But for one retreat exercise, everyone was asked to say what word came to mind when a company name was mentioned. They went through the list: eBay: auctions. Google: search. Intel: microprocessors. Microsoft: Windows.

Then they were asked to write down their answer for Yahoo. "It was all over the map," recalled Brad Garlinghouse, then a Yahoo senior vice-president and now chief operating officer (COO) of payment settlement startup Ripple Labs. "Some people said mail. Some people said news. Some people said search."

While some executives said that this was a useful management exercise that took place multiple times over the years, it proved an ominous portent of the business troubles to come.

Indeed, the demise of Yahoo, which culminated in an agreement this week to sell the company's core assets to Verizon Communications Inc, has been more than a decade in the making. Many of the more than two dozen former Yahoo managers interviewed by Reuters over the past two weeks - who now occupy executives suites elsewhere in Silicon Valley - agree that the company's downfall can be traced to choices made by both the executive leadership and the board of directors during the company's heyday in the mid-2000s.

Some of the missed opportunities are obvious: a failed bid to buy Facebook Inc for US$1 billion in 2006. A 2002 dalliance with Google similarly came to naught. A chance to acquire YouTube came and went. Skype was snapped up by eBay Inc. And Microsoft Corp's nearly US$45 billion takeover bid for all of Yahoo in 2008 was blocked by Yahoo's leadership.

Bureaucratic culture

Just as damaging as the missed deals, though, was a company culture that ultimately became too bureaucratic and too focused on traditional brand advertising to prosper in a fast-moving tech business, according to some of the former Yahoo managers whom Reuters spoke with.

"It became very difficult to get both investment and alignment" around new product initiatives, said Greg Cohn, a former senior product director at Yahoo and now CEO of the mobile phone app company Burner. "If you built a new product and the home page didn't want to feature it, you were hosed."

Worst of all, once Alphabet Inc's Google had displaced it as peoples' first stop for finding something on the Internet, Yahoo was never able to decide on exactly what it wanted to be.

Yahoo today has more than one billion users and has focused on mobile under chief executive Marissa Mayer, who told Reuters in an interview on Monday that she still saw a "path to growth" for Yahoo, which the Verizon merger accelerated.

Yahoo will continue to operate as a holding company for its large stakes in Alibaba and Yahoo Japan, which are worth far more than the core business. Yahoo declined to comment for this story.

The appointment of Terry Semel, who had completed a highly successful run as chairman of the Warner Bros movie studio, as CEO in 2001 seemed to answer a question that bedeviled many early Internet firms: Was it a tech company, or a media company?

Mr Semel could not be reached for comment on his Yahoo tenure. But the focus on media proved lucrative in the short term as big advertisers, desperate to get on board with the next big thing, flocked to one of the largest properties on the Web. Revenue soared from US$717 million in 2001 to nearly US$7 billion by 2007.

Indeed, Mr Semel and the media executives whom he brought in by all accounts turned a scrappy young Internet startup into a highly profitable company that brought old-line advertising to a new medium.

"From our perspective, we were a media company," said Dan Rosensweig, Yahoo's COO from 2002 to 2007 and now CEO of online education company Chegg Inc. "It didn't feel at the time that there was a strong likelihood we would beat Google at search . . . Nobody could argue that we weren't the largest front page on the Internet."

Yahoo placed its signature purple everywhere then - on cookies and cupcakes, on the carpets, and even in the martinis. "When Coca Cola came to campus, we rolled out the purple carpet," recalled Wenda Harris Millard, Yahoo's chief sales officer from 2001 to 2007, and now president and COO of business development firm MediaLink.

Ms Millard said that all the major advertisers, from Coke to General Motors, wanted to come to Yahoo's campus at least once a year. "We were just doing gazillions of dollars with them," she added.

But the excitement, and the revenue, associated with the big advertising deals 10 years ago turned out to be a trap in many ways. Like its brethren in the print media business, who continued to rely on selling ad pages long after it was clear that it was a dying business, Yahoo could not help but focus on where the big money was, even though that was not where the future was.

"The worst consequence of trying to be a media company was that they didn't take programming seriously enough," wrote Paul Graham, co-founder of the Y-Combinator tech incubator who sold a startup to Yahoo, in a 2010 blog post about the company's woes. "Microsoft (back in the day), Google and Facebook have all had hacker-centric cultures. But Yahoo treated programming as a commodity."

The downside of the media orientation became more clear as the 2000s wore on. In 2003, Yahoo acquired Overture, the company that essentially invented the ad-search technology that made Google rich. But Yahoo never succeeded in creating a strong competitor to Google's AdWords and AdSense systems.

A subsequent, hugely expensive effort to rebuild its search and advertising technology, dubbed Panama, similarly bore little fruit.

Meanwhile, market-leading products such as Yahoo Mail, and early social media efforts such as Yahoo Groups, were neglected as managers wrestled over which products would get priority on the hugely valuable Yahoo home page, according to three former executives. Promising acquisitions, including photo-sharing site Flickr and social bookmarking service Delicious, withered on the vine.

Shifting priorities

Former staffers said that they were consumed with endless internal meetings and shifting priorities. Mr Cohn, the former senior product director, recalled how efforts to make Yahoo an open platform - with nifty third-party applications around specific content areas such as travel - foundered in the face of opposition from managers in charge of Yahoo's in-house products.

Too often, the end result was money spread too thinly across too many marginal initiatives, as Mr Garlinghouse famously pointed out in a leaked internal document known as the Peanut Butter Manifesto.

By 2007, it was becoming clear that Yahoo was losing ground fast on the product side as Google solidified its hold on search. New players like Facebook and Netflix Inc continued to arrive and steal Yahoo's thunder. Mr Semel left that year in favour of co-founder Jerry Yang.

Whatever plans that Mr Yang may have had were quickly disrupted by the unsolicited Microsoft takeover bid in early 2008. The offer split the management team, Mr Garlinghouse and others said, and those divisions persisted even after Microsoft's offer was beaten back.

Mr Yang, who championed the resistance to Microsoft, stepped down again in 2008. Three other CEOs followed before Ms Mayer was appointed in 2014.

The leadership turmoil "made for a difficult existence for a board, a management team, and a general employee population to get committed to the same goal", said Mr Rosensweig.

Mr Yang did not respond to requests for comment.

By the time that Ms Mayer arrived, Yahoo was already seen in Silicon Valley as a company from another era. It had lots of cash but few strategic advantages as it fought far larger competitors. Many analysts and shareholder said that Ms Mayer exacerbated the troubles with acquisitions and key hires that proved misguided.

Ms Mayer put a brave face on the deal on Monday, saying that the scale that will result from the Verizon combination will enable Yahoo to continue its efforts to catch up in mobile, social and advertising technology. But the history of the tech business, where companies rarely dominate from one generation to the next, suggests that any such revival is a tall order. REUTERS