Holed up in a caravan on the campus of Stanford University in California, two graduate students were supposed to be finishing their doctoral studies. Instead, Jerry Yang and David Filo began messing around on something new called the world wide web.
Yang and Filo started fiddling with quirky home pages. Yang put up his golf scores, his name in Chinese characters and a list of his favourite websites. As they stumbled on new finds, this index began to grow until in 1995 it became Yahoo!
Throughout the rest of the decade Yahoo! was the undisputed leader among internet portals. When the company went public in 1996, its shares rocketed by 154% in a day; within three years Yang and Filo were worth $8-billion each. Things were going like a dream — until Google came along.
“Google came out with a smarter search engine,” says Mark Malseed, co-author of The Google Story. “It was much more based on relevance. They made much of their ‘purity’ … that you shouldn’t be able to pay to come out higher.”
For a time, a tussle between Yahoo! and Google enthralled Silicon Valley. But Google gained the upper hand, staffing up with cheap talent laid off by larger firms when the dotcom bubble burst in 2000.
Google now accounts for three-quarters of all internet searches. With a market value of $160-Âbillion, its power is awe-inspiring. In 2006 it swallowed the video-Âsharing website YouTube and last year its profits rocketed 40% to $4.2-billion.
Its success has been greeted with alarm by the corporate establishment. Microsoft has watched Google diversify into free-of-charge “apps” — web-based applications such as spreadsheets and word processors — that encroach on Bill Gates’s home territory.
Through Microsoft’s $44.6-billion takeover bid for Yahoo! last Friday, that establishment has hit back at Google’s seemingly unstoppable rise. The deal, suggested Microsoft’s chief executive, Steve Ballmer, was the only way to make up the gap between Google and the rest of the marketplace: “Sure, we could have hired more engineers. But the market continues to grow and the leader continues to get stronger.”
The deal is far from out of the blue. The painful struggles of Yahoo! have been all too public for years. Although it is still the most visited page on the web, its share of searches has been steadily shrinking. Microsoft, which holds third place in the search market through its MSN website, tried to talk Yahoo! management into a deal in late 2006 and early 2007, to no avail. Tie-ups between Yahoo! and eBay and Disney have also been mooted but have come to nothing.
Many argue that the Yahoo! slide has been its own fault. A software update known as Project Panama, which was supposed to tailor advertising to searches more effectively, suffered catastrophic delays. The company dabbled in social networking, auctions, photo sharing and videos without much conviction or focus. Its compliance with the Chinese government prompted a US congressman to call two Yahoo! executives “morally … pygmies”.
Inside Yahoo! unease has become apparent. Yang retook control of the company last year, but shares still slipped. “Every day it [the stock] continues to wallow, some kind of deal becomes more likely,” said Scott Kessler, an analyst at Standard & Poor’s, after Yahoo! revealed a 24% slump in profits last week.
The pressure is on. Yahoo! has responded non-committally to the takeover offer. But shareholders are likely to want to sell. Together, Microsoft and Yahoo! will be able to attract more advertisers to their combined family of websites. It is unlikely they can match Google’s mastery in “pure” internet searches. For Microsoft, buying Yahoo! is an effort to restore its once unshakeable position at the top of the technology tree. But for Yahoo! selling out will be a galling end to a once glorious, ground-breaking road.
To reassure staff, Yang addressed his entire workforce on a hurriedly arranged conference call. Microsoft had suggested it could save $1-Âbillion a year in costs — a figure bound to cause alarm about job cuts.
A tie-up of such magnitude is bound to attract the interest of regulators in the US, and the European Union is also likely to investigate. Few, however, believe that the obstacles will be insurmountable. — Â