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How Did Yahoo Lose It All to Google?

13 May, 2020

Let me ask you a question, how many Google searches have you done today? Okay, now how many Yahoo searches have you done today? Probably zero, right? I’m sure a lot of people have never even seen the Yahoo homepage.

Now it might be hard to believe, but there was once a time when Yahoo was the king web. In 1998, Fortune magazine declared that they had, 'Won the Search Wars.' [1] Clearly that victory didn't last, but what changed? How did it unfold and how did they end up losing almost their entire market share to Google?

Jerry Yang and David Filo
Jerry Yang and David Filo

Lets rewind to 1997. There are about 70 million people using the internet which is tiny compared to almost 5 billion in 2020. Between 25 and 40 million people are visiting Yahoo every single month, which is more than Netscape or AOL which were also pretty big players at the time. Yahoo is valued at $2.8 Billion dollars and has made its two young founders, Jerry Yang and David Filo very wealthy. Things are going pretty well for them.

At about the same time, two PhD students at Stanford University, Larry Page and Sergey Brin were working on what started out as a research project. A year earlier, they had built a Web Crawler, which is basically a tool that visits webpages and identifies all the hyperlinks, then it visits all the webpages those hyperlinks point to and identifies the hyperlinks on all those pages, repeating the process over and over.

Crawlers have the ability to collect enormous amounts of data, the challenge comes from processing the data and actually turning it into something that’ll be useful to people. Larry Page and Sergey Brin did just that when they developed the Page Rank algorithm. It would rank each page’s importance by the number of other pages that linked back to it. For example, if you searched for the word ‘Stanford,’ the algorithm would find the page with the most other pages linking to it, which happened to be the homepage. While it seems primitive, it was actually working better than all the other search engines available at the time.

Page and Brin weren’t making any money from their project at that point and wanted license it out to tech companies to earn some income while they continued with their studies. In fact, they offered to license it to Yahoo for one million dollars but Yahoo wasn’t interested. David Filo reached out to them and recommended that they try launching a website themselves instead of trying to license their technology. He introduced them to some investors and [2] Google was officially incorporated in September 1998. By the end of that same year, they were handling over ten thousand daily searches.

Larry Page and Sergey Brin
Larry Page and Sergey Brin

Pretty soon that number reached the hundreds of thousands and before they know it, they were processing over a million daily searches. Google was growing at an incredible rate, mostly through word of mouth. Users kept coming back to it every time they needed to look for something because it worked really well. Additionally, Google’s clean and simple user interface design was a breath of fresh air for many users who had grown accustomed to cluttered, ad-infested pages. Just one year after incorporating, Google was processing three point five million searches a day.

At about the same time, Yahoo was expanding too, not through word of mouth but by acquiring other companies that owned products they wanted and then rebranding them with the Yahoo name. Four Eleven’s Rocketmail email service became Yahoo Mail. became Yahoo! Games, eGroups became Yahoo groups, you get the idea. Their most controversial acquisition was GeoCities in May of 1999 which is a topic that deserves a whole video on its own.

At this point in time, there was a key difference between Google and Yahoo. Google was a true search engine, meaning it would search through massive amounts of webpages and return the most relevant to a user’s query. Yahoo was pretty much just directory of pages that people had handpicked. When users would search for something, Yahoo would return a list of web pages from this handpicked directory. It seems strange today, but back in the early to mid nineties, users were accustomed to browsing lists of sites organized into topics and then picking the ones that sounded interesting. This worked quite well with a relatively small number of sites, however as more and more websites were launched, Yahoo began to struggle to keep up.

Yahoo saw that Google’s method was better suited to handle the increasing size of the web. In June of 2000, Yahoo and Google entered into an agreement to make Google Yahoo’s default search results provider. So if you searched for anything on Yahoo, you would have seen this at the top of the page. Yahoo, powered by Google.

Yahoo, powered by Google
Yahoo, powered by Google

For the sake of clarity, Google’s market share bar at the bottom only includes the percentage of searches directly through Google, I’ve excluded the additional traffic coming from Yahoo.

Google spent a lot of time and money investing directly into their own products. Throughout the year 2000, they added 13 new languages, significantly expanding their reach outside the United States. They released a browser toolbar that allowed users to search without having to visit the Google homepage and they also released an online advertising platform called Google AdWords which is still going strong today.

By 2001, the Dot Com bubble had burst and the ocean of investor money tech companies enjoyed during the late 90s had pretty much dried up. Many of the small early stage tech companies went bankrupt. Yahoo and Google were among the few surviving companies, however it was clear that the tech market had changed considerably. Yahoo used this opportunity to make some more acquisitions, among them was a software company called Inktomi (INK-tuh-me).

At the same time, Google kept plugging away, investing into new products and relentlessly improving their search algorithm. In July of 2001, they released Google Image Search, and in September of 2002, they launched Google News.

Around the same time, Yahoo realizing that they were falling behind offered to buy Google for 3 Billion dollars. Google rejected the offer and countered with 5 Billion, which was roughly the entire value of Yahoo at that point. This counter offer was too high for them and they couldn’t make the deal. From there, Google continued to gain market share at a rapid rate and in early 2003, Google officially passed Yahoo in search market share. At that time, they were handling about 200 million searches every single day. Throughout the rest of 2003, they were releasing one major update almost every month.

In February of 2004, Yahoo officially stopped using Google as their default search results provider in favor of using their new Yahoo Search technology which they had developed by combining an array of technologies from their recent acquisitions, the main one being Inktomi. [3] Shortly after this, Yahoo launched a controversial paid inclusion program where companies could pay to have their websites included in Yahoo’s search results. [4] This program made a lot of money for Yahoo, however users became frustrated that the paid listings were indistinguishable from non paid results. Google on the other hand avoided paid inclusion, opting for clear visibility on sponsored versus organic results.

Yahoo Instant Search
Yahoo Instant Search

In 2005, Yahoo launched a beta version of a new search tool called Yahoo Instant Search. This time, Yahoo was definitely ahead of the curve, in fact Google’s Instant search tool wasn’t released until 2010. By many accounts, Yahoo Instant Search worked really well, it was slick and users found it simple to use. The problem was that a single search query would require multiple requests to the Yahoo servers, about one for every letter the user typed. This would have significantly increased the number of requests Yahoo’s servers would have to handle and at the time, they didn’t have the server infrastructure to handle that kind of volume. [5] Additionally, Yahoo’s management didn’t want to take the risk releasing such a massive change to their key search product. So instead, they released Yahoo instant search on a smaller, lower-traffic search engine called AllTheWeb which they had acquired years earlier.

In 2006, Google acquired YouTube and in 2007 they launched Universal Search which mixed the search results from news, videos, images and books with the usual search results. Although it seems quite natural now, at the time, the concept was considered to be a pretty substantial change to their user experience. [6]

Throughout 2007 and 2008 Yahoo continued making various acquisitions while going through a couple of leadership changes. In February of 2008, Microsoft offered to buy Yahoo for $44.6 billion, an offer which Yahoo turned down. Instead of a purchase or a merger, Yahoo and Microsoft agreed to form a search alliance in December of 2009. Just a few months later, Yahoo agreed to switch to using Bing’s search technology to power their search results. [7] So for the second time, Yahoo replaced their entire search engine with one from a competitor.

Google continued their trend of relentlessly improving their algorithm and overall user experience. In addition to desktop users, they were now also optimizing for the fast-growing mobile users as the smartphone era was well and truly underway.

Google was taking advantage of its massive size to encourage business practices that would be better for people in general, not just their users. For example, in December of 2010, they updated their search algorithm to penalize websites of businesses that were receiving a lot of negative reviews from their customers. In 2011 and 2012, they began seriously cracking down on websites that contained a lot of low quality content that had been automatically generated or simply copied from other websites. And despite their main revenue source coming from online ads, they also started to penalize websites with high ad-to-content ratios. Their reasoning was that the best possible user experience has to come before advertising.

The second half of the 2010s decade saw Google maintain their enormous market share and unfortunately for Yahoo, despite numerous senior management changes and countless acquisitions, they never regained their share of the search engine market. If it seems like Yahoo lacked a consistent direction, that’s because they did. Between 1994 and 2016, they switched CEOs six times and changed their mission statement at least 24 times. [8]

Google on the other hand hasn’t had anywhere near as many leadership changes and their mission statement has remained unchanged since their early days.

Google Mission Statement
Google's Mission Statement

Yahoo was eventually sold to Verizon in 2016 for $4.8 billion which was about one tenth of what Microsoft offered just 8 years earlier and definitely a long fall from their once 125 billion dollar valuation. While some may consider Yahoo to be a failure, many of their products are still going strong today. For example, Yahoo mail still has over 200 million active users, Yahoo finance is actually the most popular finance site in the world with over 70 million monthly active users. And while they may only have a single digit percentage of the search market, that small share is still hundreds of millions of searches per day. Yahoo is far from dead and they’ll still be around in decades to come, they just won’t be as big as Google.

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