"This article written by Paul Graham in 2010 analyzes in detail the reasons for Yahoo's failure. It focuses on two main problems of Yahoo: easy money and contradictions about being a technology company. It points out that Yahoo's methods of making money, especially banner advertisements, have transformed the company more into a media company than a search engine, weakening the company's programming capabilities. It also emphasizes that Yahoo was unable to develop a 'hacker-centered' culture, which negatively affected the company's ability to attract good programmers.
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# What Happened to Yahoo (The Rise and Fall of Yahoo: Where Did They Go Wrong?)
August 2010
When I went to work for Yahoo after they bought our startup in 1998, it felt like the center of the world. It was supposed to be the next big thing. It was supposed to be what Google turned out to be.
What went wrong? The problems that hosed Yahoo go back a long time, practically to the beginning of the company. They were already very visible when I got there in 1998. Yahoo had two problems Google didn't: easy money, and ambivalence about being a technology company.
**Money**
The first time I met Jerry Yang, we thought we were meeting for different reasons. He thought we were meeting so he could check us out in person before buying us. I thought we were meeting so we could show him our new technology, Revenue Loop. It was a way of sorting shopping search results. Merchants bid a percentage of sales for traffic, but the results were sorted not by the bid but by the bid times the average amount a user would buy. It was like the algorithm Google uses now to sort ads, but this was in the spring of 1998, before Google was founded.
Revenue Loop was the optimal sort for shopping search, in the sense that it sorted in order of how much money Yahoo would make from each link. But it wasn't just optimal in that sense. Ranking search results by user behavior also makes search better. Users train the search: you can start out finding matches based on mere textual similarity, and as users buy more stuff the search results get better and better.
Jerry didn't seem to care. I was confused. I was showing him technology that extracted the maximum value from search traffic, and he didn't care? I couldn't tell whether I was explaining it badly, or he was just very poker faced.
I didn't realize the answer till later, after I went to work at Yahoo. It was neither of my guesses. The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If Yahoo merely extracted the actual value, they'd have made less.
Hard as it is to believe now, the big money then was in banner ads. Advertisers were willing to pay ridiculous amounts for banner ads. So Yahoo's sales force had evolved to exploit this source of revenue. Led by a large and terrifyingly formidable man called Anil Singh, Yahoo's sales guys would fly out to Procter & Gamble and come back with million dollar orders for banner ad impressions.
The prices seemed cheap compared to print, which was what advertisers, for lack of any other reference, compared them to. But they were expensive compared to what they were worth. So these big, dumb companies were a dangerous source of revenue to depend on. But there was another source even more dangerous: other Internet startups.
By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of ""Eureka!"" I was shouting ""Sell!""
Both the Internet startups and the Procter & Gambles were doing brand advertising. They didn't care about targeting. They just wanted lots of people to see their ads. So traffic became the thing to get at Yahoo. It didn't matter what type. [1]
It wasn't just Yahoo. All the search engines were doing it. This was why they were trying to get people to start calling them ""portals"" instead of ""search engines."" Despite the actual meaning of the word portal, what they meant by it was a site where users would find what they wanted on the site itself, instead of just passing through on their way to other destinations, as they did at a search engine.
I remember telling David Filo in late 1998 or early 1999 that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn't worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn't worth doing better.
I didn't say ""But search traffic is worth more than...
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