So, how about that little tiny $46.8 billion dollar offer for Yahoo that our old friends up in Redmond made on Friday? Hundreds of blogs have analyzed the financial terms of the deal (Yahoo probably won’t get a better offer), what it says for online advertising (Microsoft is hurting in pay-per-click, and the failure of “Panama” by Yahoo still reverberates), and what it really means for Google (everyone else is playing for second place in advertising). But I think the failure of Yahoo in my mind comes down to two things – branding and complacency.

Let’s flash back for a moment here – before Semel, before Google stole the fun and before Yahoo became a dot-com pariah.

In 1996, rife with IPO money, Yahoo!, king of search, started it’s first round of acquisitions. Purchasing, among many others, Broadcast.com, Geocities, eGroups and HotJobs in the late 90’s, it started to swallow other brands. Brands that were strong on their own started to get prefaced with Yahoo! in front, and slowly, these brands subjugated into the Yahoo! darkness in an attempt to be all things to all people. Soon, they all became commodities, and these users became part of the Yahoo! ecosystem. Your one Yahoo! login entitled you to all of these different services, and I’d argue that Yahoo! authentication has been one of the most successful in the history of the Internet. Banner advertising still was a majority of the income, and page views were key.

But, as it turned out, the sum of these brands, never exceeded the parts, and all Yahoo ended up with was a large number of page views, with no real way to make most of them pay – a big fat, complicated mess. Users had no real motivation to pay for any services Yahoo offered, instead turning to free alternatives wherever possible. Worst of all, the company was gaining a reputation of being one who couldn’t make components work together that made sense for consumers.

Most search revenue came through enhanced Search Engine Marketing techniques, and paid placement at the top of search results. Most of this was sold as if a banner ad, per one thousand page views, and results were never stellar.

But, of course, there still was enough time to figure all of this stuff out. Yahoo! was still the king of search, and with a share price nearing $500 a share, there was plenty of money to build or buy what was necessary. No need to worry, there were no real threats to the crown (Microsoft’s MSN was years away, and Google was still in its infancy). Yahoo! was still where you went to find things on the Internet.

And then the bubble burst. The banner-ad market went bust. So did a lot of companies. Yahoo survived by sheer size. And the, something happened that changed the mix – search learned how to pay.

Pay-per-click (PPC) had existed for sometime before the Google boys came around – GoTo pioneered the concept of placing paid search results at the top of listings for certain keywords since 1998. The idea was considered blasphemous at first – as it “tainted” the search results unfairly. The big difference in the model that Yahoo had been selling for years – advertisers paid every time a user “clicked” on the search result, rather than collecting up front when a company paid for “enhanced search” products.

PPC introduced a scenario where “everyone wins” – the user finds something contextual to what they were looking for, the advertiser gets a qualified lead, and the seller of the inventory makes a few pennies for each time a result is served.

By then, the boys at Stanford had a real product on their hands, and word of mouth was spreading it around the Internet quickly, and attracting loyal users. But most importantly, in 2000, AdWords was born, and Google had started to take hold of the biggest moneymaker on the Internet – pay-per-click text advertising. But Google just made it better by taking one part of the three-legged stool – working on the relevancy of each result. The X factor that went into Google’s results involved some secret sauce that measured just how many times a user clicked on an advertisers link to ensure that people who bid, got clicked on – thus allowing a larger pool of advertisers to bid.

GoTo’s model showed its biggest flaw almost immediately in the fact that it was strictly a top down model where the person who bid highest was #1, the next highest was #2, and son on. There was certainly a lower desire for someone to bid #12 on results, especially when Overture started to distribute their search results to major portals, including AOL, MSN, and, yes, Yahoo. For a time, Overture’s first mover advantage still gave them the edge in the space, and revenue was good. But advertisers fled Overture for Google, and Google’s revenue rose, for the simple reason that the traffic was more qualified, because only the advertisers who drew clicks were available for a consumer to choose from. This was “everyone wins” round two – where, the people who were clogging up the space were removed with irrelevancy, and the bid amount was a combination of desired ranking, and intangibles, which often meant that strong brands, paid less for better results. These results were also integrated into the already available millions of Google search results pages, so Google didn’t need to share the pie with anyone else in terms of a revenue sharing agreement. Sergei and Larry saw no need to be hasty with an IPO – and they sat back and waited for the right time. Tweak the algorithms, watch what happens, and go.

Yahoo, of course, now saw their title as the Search leader start to evaporate. So, what did they do? They bought some of the leading brands in the search space, pulled it all together, and ended up with a sum that wasn’t greater than the parts. By 2001, GoTo.com had become Overture, and by 2003, Yahoo, who was their biggest customer, bought them outright.

Yahoo had all of the ingredients to build the search engine they wanted. Their stew contained Overture, AltaVista, AllTheWeb, and Inktomi, all pioneers in their own right (AllTheWeb, briefly had a larger index of sites than Google, for instance) in an attempt to build the world’s best search engine. By the time Yahoo! realized they needed a more solid entry in the paid search game than Overture (sorry, Yahoo! Search Marketing), Google had already eaten their lunch. Reticent to admit defeat, Yahoo started the Panama project – their attempt to build a super machine out of some of the best brands on the Internet.

But, Overture became the ubiquitous “Yahoo! Search Marketing” lumped into another suite of search products, none of which was easily discernable from the rest. As an advertiser, the product offerings were confusing as they were just the smoking ruins of the search brands that came before them, now thrown together in an indecipherable way. Panama was late, ended up failing, and left Yahoo with no real solution.

Their attempts at the “next big thing”, Web 2.0 and social network left them to again, acquire some of the best brands in the space, but, again, they failed to make the full promise of the sum come together (fortunately, they’ve done little to ruin Flickr as a general product – perhaps they learned their lesson?)

So, enter Microsoft, who just can’t stand to lose, and is willing to buy up a big, complicated mess that they don’t understand just to play with Google. A suite of “me too” products, an attempt at an online service, failures in search marketing (sound familiar?) They are no strangers to complacency, and now they’re learning in their core business (Vista sucks) just how hard it is to be on top forever. Who is eating their lunch? Well, that’s fodder for my next post, I suppose.

Watching ABC World News tonight, the anchor made a very true, but sad statement, in deference to Google’s place in the lexicon today… “When was the last time you Yahoo’ed anything?”.

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