When giants stumble

Yahoo suffered all the classic weaknesses of large corporations

Now that one of the world’s earliest search engines and email portals is about to have its identity subsumed by Verizon and its rump reduced to an investment management company, it is worth wondering how a former giant, once a potent symbol of Silicon Valley’s dynamic entrepreneurship, became a wan midget in 22 years, a remarkably short lifespan even by the standards of technology companies. Yahoo’s obituary was, in fact, being written all over the US business press as early as 2015 and, no surprise, management bible Harvard Business Review has already produced a potted case history of its decline. Most of the literature has focused on the specific reasons for the steady erosion of the Internet behemoth, once a favourite on Nasdaq. The disastrous history of serial mis-steps, however, contains a critical management lesson for all large corporations. Like Nokia in mobiles, and IBM in mainframes, the roots of Yahoo’s failure lay in its dominance, which blinded it to the innovative revolutions to come: in mobile, online content, social media and even e-commerce.

In the immediate aftermath of the $4.8 billion Verizon deal, the lion’s share of the blame has been assigned to the high-profile Marissa Mayer, whose four-year stint saw expensive acquisitions (Flickr, Tumblr and so on) worth some $3 billion, but the notable absence of a breakthrough turnaround strategy, which possibly accounted for a brain drain from the Sunnyvale, California, company. The hacking scandal — discovered a shocking two years after it had started — and revelations that Yahoo had shared user information with US security agencies did little to help her cause. Though she arrived with impeccable credentials from the Google stable, the fact that Ms Mayer was the fifth chief executive in five years was an indication of the structural problems she would face. To be sure, Ms Mayer would talk about a strategy for smartphones, but Yahoo was five years too late — Apple and Google had long appropriated that space, and it is almost symbolic that Yahoo’s demise would coincide with the tenth anniversary of the introduction of that life-changing gadget. Overstaffed and complacent, Yahoo remained outside the tide of change that other successful competitors rode — e-commerce, social media and even online content. Even its core search identity was swamped by Google.

The story may have been very different if Jerry Yang, the iconic founder who stepped down as CEO in 2008, had not been blinded by the classic founder’s hubris and turned down a $44 billion bid by Microsoft in February of that year, a 62 per cent premium over Yahoo’s share price at the time. Steve Ballmer made no secret of the fact that he was looking to strengthen Microsoft’s position on the web and in the search engine business. For a company that was struggling to lock in a sustainable cash flow, this merger would have been pure gold. But Mr Yang, perhaps with an exaggerated notion of his bargaining power, decided to hold out for a better deal, which Microsoft duly offered in the form of a 77 per cent premium on the share price. When Mr Yang continuing to demur, holding talks with AOL (now, ironically, in the Verizon stable) and News Corp, Microsoft eventually walked away. That failure couldn’t have come at a worse time because another key deal — of sharing ad-revenue with arch-competitor Google — foundered on objections from the competition regulators. Ironically, it was Mr Yang who was responsible for buying a stake in Alibaba in 2005, which has now become the principal source of earnings for the remnant Alibaba.