A Yahoo! moment.

I'm reading a book by Steven Levy "In the Plex: How Google Thinks, Works, and Shapes Our Lives." It confirms the finding I've been teaching in my Principles class since 2005 that the main reason Google became successful as a business was the shortsightedness of Yahoo's management.

After testing Google and visiting Larry Page several times, Manber [the head of Yahoo search department] recommended that Yahoo use its technology. One concession that Yahoo gave Google turned out to be fateful: on the results page for a Yahoo search, the user would see a message noting that Google was powering the search. The page even had the Google logo. Thus Yahoo’s millions of users discovered a search destination that would become part of their lives. 

The common argument that Google won the search battle with Yahoo due to its superior search technology doesn't hold because there were no battle. Yahoo used Google as their search engine. The search results for Yahoo and Google users were practically identical. Moreover, Yahoo helped direct users to Google's search page because better search lead to higher fees.

They [Yahoo] noticed that search was better and used it more. “It increased traffic by, like, 50 percent in two months,” Manber recalls of the switch to Google. But the only comment he got from Yahoo executives was complaints that people were searching too much and they would have to pay to Google.

In other words, Yahoo willingly directed its users to Google search page because there was no business model to make money on traffic. The breakthrough model to monetize search traffic was invented by Ted Meisel of Overture Services. As a result, Google’s search technology applied to traffic generated by Yahoo and monetized through Overture’s ad auction idea made Google a dominant player on the web. In 2003, Yahoo acquired Overture and sued Google for patent infringement. In 2004, the companies settled, with Google giving Yahoo 2.7 million of its shares in return for license rights to US Patent 6,269,361, and related filings. 

Just like IBM gave away future billions in revenue when they partnered with Microsoft to write a PC operating system, Yahoo gave away its future (a Yahoo! moment) when they agreed to put Google logo on their search results. The same happened to Apple when they cooperated with Google on putting together iPhone applications (GMail, Maps, Youtube, etc.). In contrast, Facebook rejected cooperation with Google and chose its own path.

Another interesting conclusion to draw from the episode is the resiliency of  Yahoo. Despite all the dumb business decisions the company made over the years, they are still doing ok. In the automotive industry they'd be long dead or begging for a government bailout. As people say, the rising tide lifts all boats.

tags: business, google, trade-off, model, search, source