The rise and fall of Yahoo

Back in 2002, the CEO of Yahoo sat down for dinner with, uh, two guys, Larry and Sergey, and they offered to sell their search engine for a cool billion dollars. Yahoo's CEO at the time was a guy named Terry Simmel. He agreed over the dinner, but then a few days later, the guys came back. The price had changed, and now it was $3 billion. Simmel, he walked. That search engine, well, it was Google. and today it's worth over $2 trillion. For those of you keeping score at home, that's $2,000 billion. Yahoo missed this chance to buy Google. They also missed their chance to buy Facebook, and they also missed their chance to sell to Microsoft for $45 billion before it kind of all went to nothing. Yahoo, a company that was one time worth over $125 billion, Eventually sold for about 4 cents on the dollar, $4.5 billion. In Yahoo, massive wealth was created and massive wealth was destroyed. This video is the rise and fall of Yahoo.

Oh, and by the way, thanks to DeleteMe for sponsoring this video. More on them later.

If you would like more in-depth about each and every single story, including this one, you can download it on my website, girdley.com/youtube. How It All Happened starts with two Stanford grad students, Jerry Yang and David Filo. Instead of working on their dissertations, they found themselves bookmarking cool stuff on the internet. They called it Jerry and Dave's Guide to the World Wide Web. But by the end of the year, it was getting over a million hits a month. And Stanford, well, they were pissed, and they told the guys to get their website off their servers. They renamed the site Yahoo, and in 1995, they dropped out of Stanford. They raised money from Sequoia Capital, one of the most famous venture capital funds in Silicon Valley. And then a few months later, the guy behind SoftBank, Maiochi-san, he brought in a bit over $100 million for 33% of Yahoo!. This was the beginning of the dot-com boom. And it turned out back then you could go public pretty easily. And in 1996, with less than 50 employees, Yahoo! started trading publicly. It was an instant hit. The stock opened at $13 and by the end of the first day was at $33. The stock market valued this little company with only 49 people at nearly $850 million. And here was Yahoo getting valuation like it was a technology company and the next Microsoft. But it's important to remember Yahoo at its core was just a list of websites. It was a media company, not a tech company. This will prove to be pretty important later on in the story as people try to understand what to do with the business and how it all goes wrong. As the dot-com boom started to come in line, online in the late 1990s, Yahoo was basically the epicenter of the internet. Yahoo Mail was the number one mail service. Heck, I used it. They had other sites that they had bought. GeoCities was one. It's a place you could make a personal website. And if you wanted financial data, no better place to go and watch your stocks moon during the dot-com boom than Yahoo Finance. If you were online in 1999, there was a very good chance you were using Yahoo for at least something and probably more than one thing. Back then, the ways to make money were pretty simple on the internet. Basically, people had taken the roadside billboard model and put it on web pages. So banner ads was how advertisers were reaching eyeballs. And in 1999, Yahoo had an astounding $588 million in revenue, mostly from these banner ads. From 2000 to 2004, Yahoo basically outsourced all of its search to Google. In other words, they were training people who were coming to Yahoo to eventually, well, start to love the site that was going to be eating their lunch later on. On January 3rd, 2000, at the peak of the dot-com boom, the value of Yahoo as it was publicly traded on the stock market hit $125 billion. To put that in perspective, that was more valuable than Ford, GM, and Chrysler all combined. March 10th of that year, 2000, that's when the Nasdaq hit its peak at over 5,000. 2 years later, it would lose over 78% of its value. As the dot-com bubble burst, so did the value of Yahoo. Remember, so much of what was going on back then was people raising venture capital money, and then they would go drop that money on sites like Yahoo or AOL in order to try to get eyeballs and traffic to their startups. The problem was that wasn't sustainable. Many of those startups like Pets.com and stuff, they weren't profitable. And when the venture capital would eventually run out, That meant, well, they would stop spending money at places like Yahoo. And so that's what happened to Yahoo stock. It went from nearly $120 down to nearly single digits. By 2001, Yahoo stock was down an astounding 93% just over a year. At the peak, founders Yang and Filo had been worth nearly $22 billion. During this period, their shares went down to less than a billion in valuation. And here's the crazy part. Remember David Filo, one of the co-founders? He didn't sell a single share. The CEO who was overseeing all this as revenue went from over $1 billion to down to just over $700 million during this period of time, his name was Tim Koogle, ironically rhyming with Google. But he stepped aside and the board decided to make a pretty aggressive and radical choice for the next, the next CEO.

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And that's where the guy, the CEO that I mentioned earlier in the story, Terry Semmel, He entered the picture. He had worked at Warner Brothers and run it for nearly 24 years. He had greenlit movies like Batman and, well, Lethal Weapon and stuff like that. He was a Hollywood media type. He was so in demand that the board of Yahoo gave him $110 million worth of stock options just for taking the job. Early on, it looked like he was going to be making all the right calls. He actually 6x'd revenue during the period of time that he was there. He knew how to run the big media playbook. He took revenue from under $1 billion to over $6.4 billion in 6 years. That was a 9x increase in just 5 years. But here's the thing about your strengths in life. If you're really good at one thing and you, and you have a lens of how you look at stuff, and in case Simmel's view of the world was entirely somebody who grew up in the media business, that meant he didn't understand technology. That brings us to the anecdote that started this story when Simmel was having dinner with 2 young Stanford dropouts. Larry and Sergey, the guys behind Google, who initially wanted $1 billion for their search engine, then a few days later decided they want $3 billion. And, well, Simmel, he balked. You kind of can't blame him. At the time, Yahoo was only worth $5 billion in the public markets. If they bought Google for $3 billion, basically be a merger of equals. And to some extent, you can't blame Simmel for doing what he did. At the time, AdWords had been created. Gmail wasn't a thing. Google Cloud, well, they hadn't even invented the cloud yet. All of the things that would eventually propel Google to stratospheric heights in terms of revenue, those weren't there. And so you can't really blame Terry for walking away. While Simmel had done an amazing job of rebuilding the sales team and growing revenue using basically an old business model, the big media one, the problem was that Yahoo had missed the opportunity to see the bigger opportunity, which was helping people find stuff about the broader web, not just the stuff on the Yahoo website. And so while Simul did try to catch up, it was too little too late. It spent over $1 billion for a site called Overture, which was a website, a little search engine. They bought InkTomi for $250 million or so, I think. And in the grand scheme of things, that was fine. But the problem was, as is most of tech, Google had too early of a lead. It was going to be too difficult for Yahoo to catch up. That would eventually prove in the numbers. Google would go public at a $23 billion valuation back in 2004, which seemed like a lot of money, except today it's worth over $2 trillion. What happened next? Well, in 2006, the board of Yahoo authorized Simmel to spend up to $1.2 billion to buy a site called Facebook from a young entrepreneur named Mark Zuckerberg. Zuckerberg wanted $1 billion and Simmel only wanted to pay $850 million. They couldn't agree upon a price and the deal never got done. Facebook would eventually go public for $104 billion valuation in 2012. And for those of you keeping score at home, these two acquisitions alone would have been, let's say, a grand total of $3 or $4 billion for Yahoo. The combined valuation between Facebook and Google today is over $3 trillion, $3,000 billion. Inside the company, people saw the problem. In 2006, an executive wrote a manifesto called the Peanut Butter Manifesto. And basically he argued that Yahoo was trying to do too much and spreading itself way too thin like peanut butter. The memo basically said that because Yahoo wasn't focusing on doing a few things well, It was doing a bunch of things poorly. And embarrassingly for Simmel and the board and everybody else, the memo actually leaked and went out into the press. And two things happened. One, the board did nothing, just kind of ignored it and kept doing the same stuff. And the other side of it was that memo became one of the most quoted and famous memos in the history of kind of tech strategy. But interestingly enough, the guys that had kind of screwed up the classic business model of eyeballs and display ads inside of Yahoo, Well, those guys actually had some vision. And Jerry Yang in 2005 had invested $1 billion of Yahoo's money in a nascent e-commerce site in China called Alibaba. He bought 40% of it. When Alibaba went public in 2014, it was the largest IPO in history. Yahoo would go on to make a 3,500% return on that billion-dollar investment, cashing out along the way until eventually the thing went public. Ironically, at this time, it was very difficult for Western investors to buy into China's stock market. And, uh, crazily enough, this is one of those situations where people were buying Yahoo stock just so it could give them access to the Alibaba share that it owned of the company. 15%. Remember how Semmel had brought the ad business into modernity and caused revenue to grow? Well, revenue had peaked at $7.2 billion, but by 2012 it was shrinking. It was down to $4.5 billion. The reason? Google and Facebook were eating that business for lunch. Yahoo would go on to be kind of Well, going a bunch of different directions between 2006 and 2017, they had 7 different CEOs, and the company that had once been the front door to the internet over this period of time just became a, uh, basically a wrapper for somebody else's stock, Alibaba. In 2007, the board pushed out Terry Semmel and brought back Jerry Yang as CEO, the co-founder. In February 2008, Microsoft CEO Steve Ballmer prepared an offer for $44.6 billion to buy Yahoo!, a significant premium over what the stock market was valuing the company on. And remember what this was. It was February 2008, before the financial crisis hit. And Jerry, this had been his life's work. He'd started the thing in his dorm room. So it's kind of normal for somebody to be emotional about their baby and want to keep it. Plus, they had all the Alibaba stock. The thing is going to be worth tens of billions of dollars just on that stock alone. Ballmer sweetened the offer to $47.5 billion. Yang, he still said no. On May 3rd, Microsoft in 2008 withdrew their offer for Yahoo. The stock market didn't like that. It went down. The stock went down 15% in one day, wiping out $6 billion in valuation. Activist investor Carl Icahn started a proxy fight to try to get the deal done. Shareholders sued. It was a mess. You know who left? In 2009, the board brought in Carol Bartz from Autodesk. If you don't know Autodesk, it's CAD software, basically big enterprise software that people were using back then to draw basically designs inside of computers, computer-aided design. She was basically lasted a couple years and then the board fired her. She resigned by sending an email to the whole company. Next, in 2012, they hired a guy named Scott Thompson from PayPal. He lasted less than a year. The reason he left, well, somebody discovered he faked his resume and he didn't really have a computer science degree. It's kind of a different time back then. I don't know that people get fired for that anymore. Then they brought in a guy named Levinsohn, Ross Levinsohn, as an interim, and then they brought in another hire and she was supposed to fix everything. In 2012, the board hired a 37-year-old Marissa Mayer. She had been employee number 20 at Google. She was going to come in as the CEO of Yahoo. Marissa's strategy was to acquire. She deployed $2.3 billion to acquire over 50 companies. The idea was to bring in technology and content into Yahoo and figure out how to make money from it. The biggest of those was a $1.1 billion acquisition of a site called Tumblr. Remember the site because it kind of proved to be important later. It turned out, well, there was a lot of porn on that site. During her tenure, in the first 14 months, the stock of Yahoo doubled. But that wasn't because of what she was doing. It rose because of the Alibaba stake, and it was rising in the background. And remember Tumblr? Well, it would be kind of the first domino to fall. Uh, basically Yahoo would write down $712 million of its valuation that year saying basically they had overpaid for it. And eventually when all was said and done, Tumblr would sell for less than $20 million. Then in 2013, something really bad happened to Yahoo, and that was the breach. A group of hackers supposedly connected to Russian security, uh, broke in and stole basically all the information to every single account on Yahoo. Which would be okay except there were 3 billion of them. Another one came along in 2014, a breach of 500 million customer data points and the internal security teams knew and leadership, well, they basically just wiped it under the rug. And here's the crazy thing about leadership then, those disclosures in both cases didn't happen for years until later. They only basically did the one in 2013, they only disclosed that one in 2016 when they were forced to. Because Marissa and the folks were about to sell Yahoo to Verizon. Verizon cut $350 million off the final price because of this. The final sales price? $4.5 billion. Remember, this was a company just about 15 years earlier that had been worth $125 billion. Marissa Mayer ended up making $239 million over that period of time and got $23 million in severance. The general counsel of the company? Well, that person resigned, got no severance. If you've watched my video that I did on AOL, that's where this story and that story get intertwined. Verizon was the buyer of AOL and also the buyer of Yahoo, and they merged them together into a new unit called Oath. Problem was, it didn't work at all. Oath ended up being a $4.6 billion write-down for Verizon, and there had been some financial engineering. Remember that Alibaba stake that had been propping up Yahoo for years? Well, they had also had a big investment in Yahoo Japan. Which turned out, you know, they like the display sites over there in Japan. And those two things have been spun out into their own company called Altaba. And the key thing was that separated all that kind of value of Alibaba from, uh, booing the stock price and performance of the core Yahoo business. The good news is, well, at least for shareholders, all that would turn out to be worth tens of billions of dollars for those folks. There are some private equity firms out there that specialize in well, let's say more distressed or end-of-life kind of technology stuff. One of those is Apollo. They ended up buying the Yahoo business from Verizon in 2021 for $5 billion. The brand still exists. The properties are out there— Yahoo Finance, Mail, some of the sites— and there's 900 million users still using Yahoo. It's one of the things about some of these vehicles, including like AOL dial-up and AOL email addresses. There's millions of people using those things. Same thing going on with Yahoo. It takes a while for some of this stuff to die. In the end, if you look at the failure of Yahoo, it's because it was originally started as something that was very valuable and specific. It was a directory that then became a portal that basically showed people their gateway to the internet. But when search engines and social networks and all those types of new technological innovations made that obsolete, Yahoo decided to try to be all those things as opposed to just being one or a few things and being really, really good at that. And ultimately, this lack of focus is what killed them. If you're not going to be great at something, well, then you're going to be bad at a lot of things. Great Steve Jobs quote where people would ask him, how do you go about figuring out what's going to be inside of your devices that you build for Apple? And he had a great quote. He said, that's not the hard part. Any person can figure out what they're going to work on or extra initiatives that they're going to do. The hard part is having the courage to kill stuff and really focus on doing a few things incredibly well. And if you're running a business, you see this happen over and over again. And I've watched teams who are high-performing keep adding more and more complexity and more and more scope to what they're doing rather than just doing better at the core things that they're really, really good at. And it's the hard thing to do as a CEO is to have that discipline because people keep adding stuff. Sometimes your job is just to tell them no. All right, Yahoo's been requested a lot on this channel. If you enjoy this, let me know in the comments below and encourage me to make more. Catch you next time.