The Yahoo! business strategy
By 1995, Jerry Yang and David Filo had at last realized that the business with the most potential was the one they were fiddling with as a hobby. The business plan they wrote this time was to stand them in good stead - a strategy of building a brand around a piece of technology that everyone would want to use. Yang explains:
'We have been consistent with what we wanted to achieve right from the start; our strategy has never really changed. We didn't view ourselves only as a search engine, we saw ourselves as a brand before we knew what a brand was.
'Coming up with a name like Yahoo was something easy for people to remember us by. We didn't hire a branding consultant, we didn't spend thousands of millions of dollars trying to market this thing. People remembered it, people thought that we knew that the landscape of the web was going to change and trusted us.
'From 1995–6, it was obvious that websites were going to become more sophisticated, people were going to want more out of them. So we were able to change with our users. As users got more sophisticated we got more sophisticated, so we never just focussed on one aspect of what the portal functionality is.
'We also knew that in order to be successful we had to find the right strategy. The first part of this was that our brand was more important than the technology itself - we maintained the brand to be something very flexible. This enabled it to migrate from being a search engine to content provider to commerce player to communications provider - we do all these different kinds of businesses.
'The second part is that we found a strong management team. We were very fortunate to have found a group of people equally passionate about the internet but who had different skill sets. That really helped to grow the company, really worked as a team. It wasn't one guy directing the traffic, it was all of us reacting and trying to grow the business at the same time.
'Thirdly, we had a business model that worked as advertised if you excuse the pun. The point is that if we had a great brand, management team and product, but didn't have a great business model, we would not have been as successful. I think that the whole internet now is being viewed as much more than just sort of a medium or vehicle - it's also an economic phenomenon. And to have companies like ours go through the kind of growth that we are, but also achieving this profitability, is a key reason why people look at us and say, "Hey, these guys have really separated from their competitors".'
Why did he think that the Yahoo team got 'it', the raison d'être of the internet, and others didn't?
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'I think we understood how big we could be. In retrospect everything we thought was going to happen happened, but five times greater. But I remember David making a very astute observation which we stuck to very early on, and that was that the internet needed an organizer. The internet is always going to be decentralized, it's not going to be one group or one company that's going to be in control.
'So our philosophy was that if the internet got big we were going to have to get big; if the internet didn't make it we weren't going to make it.
'We were focussed on helping people be organized. It meant you had millions of pieces of documents of information on the one hand and millions of people going on the web on the other, and how do you help them find each other. It sounds simple now, but at that time, you just don't know how much things will change. You have to remain really flexible in order to make that goal a reality.'
But it was one thing to come up with a smart business plan, quite another to then offer services for free. How did they come up with that as an idea?
'You have to remember that at this time, say '94, we offered this as a hobby to Stanford's university network, so it was still very academic, very research-driven. But then we got some venture capital and we had to come up with a business plan - we had to actually think about this as a business.
'The first question was how are you actually going to make money from this, and we had a choice: we could charge people for using us or charge somebody else. The conclusion was it was much more important for us to keep an audience who wanted to come back to us and keep it free as much as for heritage as for anything else. So we focussed on how we could derive some revenue from other means.
'The advertising model was just emerging, just being tested on the web and I think it was kind of a wild bet back then to say hey we're going to base our entire business on this advertising model. If you go back and read our prospectus or our history, I mean, read the 'Big Risks' section - like advertising industry's not for the internet, it may never work but we would rather take that chance than pissing off our users and getting them to feel like we'd sold out, like now we have to charge you etc. etc. So that's an important philosophy even to this day.
'We really don't have any services that charge people. You look at the amount of functionality we provide, as a whole, it's an amazing amount of things you can do for free. At least if you pay to get on the internet you can get it for free and we are really good at taking revenues from advertising and marketing.'
e-commerce is becoming an increasingly important part of Yahoo's strategy
In addition to these sources of revenues, e-commerce is becoming an increasingly important part of Yahoo's strategy:
'We offer a lot of services to our users to make shopping easier for them, but we also offer a lot of services to merchants who want to sell the products on the web. In effect, we play an intermediary role, enabling users to find the things they want to buy on the web, while enabling sellers to find the users that want to buy from them. It's good for them and it's good for us - we don't handle the transactions directly, but we're an enabler. And we do that in a bunch of different ways in which people find shopping on the internet compelling.
'There's also a business model that gets us into servicing clients from a store front, kind of renting out store fronts, that sort of thing. But in the end it's a fairly simple consumer proposition, i.e. you can find anything you want to buy on the web, which is, I think, a very good extension from where we started.
'In the US, we have had a Yahoo shopping section that's been up and running for almost 18 months. We also have Yahoo auctions which is the second largest auction platform, and we have Yahoo travel which millions of dollars' worth of tickets are being sold on every month.
'For example, in September, the amount of transactions we enabled - meaning the gross products and services that were sold directly on our Yahoo shopping, auctions and travel platforms - was well over $100 million. That's just in one month, so it's very much happening as we speak. We expect that number to grow dramatically because the amount of consumer spending on the internet in the US is rising dramatically.'
The business-to-consumer revenue model operates in a variety of different ways. Yang explains:
'The business model over the next few years is mostly going to be a percentage of the transaction done. But we do offer different models. Some small stores don't want to do transactions for a percentage of sales, they just want to pay rent. Others say well if you give me a certain amount of volume I'll pay you a certain amount of fees. So it's a blend but I think conceptually the more traffic we drive the more successful our partners are and the more successful we will be.'
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There is also a business-to-business e-commerce strategy:
'One of the companies we acquired this year (1999) is called broadcast.com and this does two things. One is they have a lot of rich media, audio, video streaming, content, and sports games. So from a consumer standpoint, you can listen to a ball game, and watch a movie, etc. But the other side of their business, which is very innovative for us, is enabling us to get into business services. What they do is they help businesses conduct events. For example, if a company has a conference call, most are broadcast over broadcast.com. So, although it's small right now, we do have a growing business that is focussed on the business enterprise sector.
Ultimately we're still going to be more informational rather than infrastructure-based, we're not going to go and deal with setting up computers and setting up networks and setting up heavy software. It's really more of an application arena we'll be part of, but it is a growing area.'