Heitor Shimizu, of Exame, a Brazilian business magazine asked me to answer some questions on Yahoo! It’s published by Editora Abril S.A. They seemed pretty happy with the results, so I asked them if they minded me adding the Q&A here:
1. Yahoo! history is a big part of Internet’s own history. For several years, that was the company to watch, a role model. Now, that scenario is pretty much only that, history. Yahoo! is still one of the biggest firms, it’s profitable, they have a market cap at above US$ 36B, but… In your opinion, what were Yahoo!’s biggest mistakes - for going from the number one internet company to being eclipsed by Google.
ANSWER: Yahoo! grew from about 2,500 employees to over 11,000 in a few years. That is certainly not a mistake, it’s a sign of growth and with growth comes growing pains. It did not help that the man brought in to be CEO, Terry Semel, was a traditional media person who simplified the business units but created extra layers. So it was this combination that allowed other companies to pass it. Some will say “Yahoo!’s mistake was not buying Google, or not buying Facebook, but I do not think these are fair criticisms. After all, why didn’t we all invest in Google’s IPO? At the time, Google had a fantastic business but to guess that today Google would generate $10B in revenue was simply absurd. That being said, if Yahoo! grew headcount too quickly and its excessive layers of management did not allow it to pull the trigger on either the Facebook or Google deals, then ok, that I can accept…”
2. Maybe the best case scenario for Yahoo! is either being “just” the number 2 (or 3) or being acquired by Google — in which case they can have almost the market cap of Microsoft, as you described. But Jerry Yang said they will continue “being independent”. Do you think Yahoo! can compete and win this battle against Google or are they way too behind for that?
ANSWER: Jerry Yang is a very smart individual. He is saying all of the right things right now. I think being #2 is a very admirable position, even General Electric’s former Chairman and CEO, Jack Welch (the manager of the century by most accounts) said being #1 or #2 is fine. This is especially true for high-growth industries such as the Web. But, the key thing is not so much about Yahoo!’s unique reality, it’s a systematic reality: as the #2 in search, investors will benchmark Yahoo! to Google. The effect of this is that the market will not command a premium for its strength in display, video, etc., but will always price it at a discount at Google. Selling to MSFT creates some problems in that the online business are very similar, both have email, both have portals, both have search etc. As a Yahoo! shareholder, of course, I would welcome a $50B acquisition by MSFT. But strategically, a merger with eBay makes more sense, because there is less overlap. But I think that this means that Yahoo! must give up over 50% to eBay and this does not represent a win for shareholders… whereas a sale to MSFT would be a win for shareholders and through sheer numbers create a massive online giant.
Ultimately, given the influx of private equity deals, I still think Yahoo! is really a PE target. It generated $700M in EBITDA in 2006 and with 11,000 employees, you can cut quite a bit and actually help the firm.
3. Why do you think some companies like Yahoo stop to innovate up to the point they even neglected their origin and their (faithful) customers’ feedback.
Why is it so difficult to expand the innovation process and extend their markets? We can see a similar scenario with Palm and the smart phone companies, in AOL and the open portals and services, in Sun and other companies servers and so on.
ANSWER: Some of this stems from the so-called innovator’s dilemma, but a lot of it simply the adage that old companies do not really innovate because they’re not as hungry, not risk-takers etc. The innovator’s dilemma largely has to do with a company not wantintg to cannibalize its existing businesses. I don’t see that as the case here. With Yahoo!, it really was that much like Yahoo! overtook AOL as the first champion of Web companies, it’s natural for Google to surpass Yahoo! This does not guarantee that someone will surpass Google, but that has a lot to do with search being one of those “one in a lifetime” opportunities that Google capitalized on from a market share perspective and then was able to leverage to build an advertising business. Google has already become a MSFT of sorts in search and advertising, much the same way that MSFT would bundle things in its operating system and productivity suite, Google has, does and will the same… But the market is currently putting a big premium on Google and a discount on Yahoo!, not so much in a P/E sense, but in the sense that search will slow down to grow whereas video and display will grow fast. Those are areas that Yahoo! is strong. But even there, it is not Yahoo! or Google who are the inventors or innovators, these companies will leverage what they have to acquire etc., but the innovators and inventors will be new players: MySpace, YouTube, Facebook, WatchMojo.com… just kidding (I think about the last one).
Frankly, considering the FIFA U-20 tournament is going on now and Brazil is (naturally) participating, I am surprised anyone in Brazil is actually working…
What do you think? What makes companies lose their innovator’s egde?
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