DOES THE SNAPCHAT GENERATION EVEN KNOW WHAT YAHOO IS?
By Om Malik , 11:18 A.M.
Following a multibillion-dollar acquisition deal, Tim Armstrong, the C.E.O. of AOL, will oversee Yahoo’s integration into Verizon.
Following a multibillion-dollar acquisition deal, Tim Armstrong, the C.E.O. of AOL, will oversee Yahoo’s integration into Verizon.
PHOTOGRAPH BY BENOIT TESSIER / REUTERS
The $4.8-billion acquisition of Yahoo—the brand and its Internet properties—by a telephone company, Verizon, is a watershed moment in the history of the Internet. It caps off an era—Web 1.0, for lack of a better term—that will soon be remembered much like telegraphs and rotary phones. Like Verizon’s similar purchase, last year, of another ancient bauble, the once ubiquitous dial-up service AOL, the acquisition of Yahoo speaks mainly to the past. Tomorrow’s Internet users don’t dream of using Yahoo’s properties any more than they do AOL’s. Instead, they lavish their attention on Instagram and Snapchat, Musical.ly and Spotify. And software continues to move in directions far removed from the early Web, as new voice-based interfaces, on devices such as Amazon’s Alexa and Google’s Home, train us to think about the Internet beyond browsers and smartphones.

For the past few years, as Yahoo has desperately sought to reverse its fortunes under its latest C.E.O., Marissa Mayer, I’ve been pointing out that the company is going around in circles, reminding us that in Silicon Valley, unlike on Wall Street, there is no such thing as too big to fail. And yet Yahoo and its backers continued to tout the potential value to advertisers of its gigantic user base and audience, and its widespread brand recognition. In a press release announcing the sale, Verizon used similar language. “The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising,” Lowell McAdam, Verizon’s chairman and C.E.O., said.

On his blog, the venture capitalist Fred Wilson suggested that this goal might be optimistic. “These are not growth businesses, they are mature businesses. So it is time to extract profits, not revenue growth, and run them appropriately for what they are,” he wrote. Yahoo says that it has a billion monthly active users, six hundred million of whom use its mobile service each month. Those numbers come from the company’s internal metrics, though, so I take them with a bucket of salt. If its user base were that large and active, Yahoo’s revenues wouldn’t have been shrinking—from $4.7 billion in 2013 to a projected $3.6 billion in 2016, according to estimates from Macquarie Securities. Its net display-advertising revenues, meanwhile, have been flat, hovering at around $1.7 billion since 2013, while its net search revenues are down, from $1.7 billion in 2013 to an estimated $1.2 billion in 2016.

It has been a long, long fall for Yahoo. Many of us have fond memories of the company and its emergence, in the nineteen-nineties, as a directory for the Internet. I even remember submitting, to what was then a baby Yahoo, the details of an early Web site I had put together. I became seriously addicted to the portal’s Site of the Day feature, which let me find marvellous wonders on what was still a very tiny Web. Over time, the directory grew, eventually evolving into a search engine. (The directory persevered until New Year’s Eve, 2014.) Yahoo began adding new services: e-mail; a personalized start page, MyYahoo; financial news; stock quotes; message boards. It gained millions of dial-up users and kept them coming back, as its stock-market value rose accordingly.

But Yahoo failed to adapt to the emergence of broadband and the attendant Cambrian explosion of Web pages, which made directories and their troves of hyperlinks suboptimal, compared with simple keyword searches. Google indexed the Internet nearly in real time. Yahoo tried to improve its search capabilities, for instance by buying companies like Inktomi, but in the end it relied on its hybrid of media, technology, and services, with the emphasis on media. Its sheer size kept it solvent, as advertisers poured in money for banner advertising on a large scale. Google’s nimbleness, though, made it the preferred tool for the Web 2.0 era, and its other services grew as Yahoo fell further behind. The rise of the social Internet, of Facebook and Twitter, accelerated the decline. I am not sure the Snapchat generation even knows what Yahoo is.

The company’s most recent missed opportunity was the rise of the mobile Web. Its failure to gain traction on smartphones can be traced, in part, to a bungled C.E.O.-hiring process, which led to the brief tenure, in early 2012, of Scott Thompson, who was found to have falsified his credentials. As Vauhini Vara wrote for this site last year, Yahoo had, at the time, a very popular messaging app, but it was coming from very far behind, and was unable to parlay this advantage into meaningful mobile growth. Today, its other apps, like Yahoo Weather, have fewer than five million monthly active users, while its search and news apps are hovering around just over a million monthly active users. If they were startups, they would have been shut down a long time ago.

Mayer, who took over in July, 2012, made some big bets, such as buying Tumblr for a billion dollars, in an attempt to gain a toehold among younger Internet users. She also tried to attract talent with smaller acquisitions, while trying to fend off activist investors who wanted the company to cash out its lucrative investments in Alibaba and Yahoo Japan (which were not part of the Verizon sale). But the writing had long since been on the wall.

Yahoo is a perfect illustration of how large Internet companies die—by fading into irrelevance. A healthy Internet service possesses three qualities: it encourages habit formation; it appeals to a younger demographic, which can age alongside it; and it displays evidence of growth. Yahoo once had all of these qualities; now it has none. These days, despite my early affinity for the company, I don’t use any Yahoo products except for its fantasy-baseball pages—and those only because my fellow stat nerds won’t switch to ESPN. Every time I log in, I am reminded of the company’s mediocrity.

All of this raises the question of why Verizon has decided to invest nearly five billion dollars in Yahoo. Tim Armstrong, the C.E.O. of AOL, who will oversee Yahoo’s integration, has suggested that Verizon dreams of becoming a third option, behind Google and Facebook, in digital advertising. By combining AOL’s and Yahoo’s user bases with its own customers, Verizon hopes to accumulate some two billion users—a number that Armstrong thinks is necessary to be a viable platform. “Scale is as imperative now as it’s ever been,” he told Recode after the Yahoo purchase was announced. But, with Google and Facebook controlling about eighty-five per cent of all digital-advertising dollars, Verizon is fighting for scraps.

Armstrong’s dream of becoming a third option appears unrealistic. It is not clear how widely used Yahoo and AOL remain, nor how engaged their users are on a daily basis. After years of providing what Fred Wilson called “the training wheels that got us online,” they are now effectively being propped up by deals that prioritize their services on web-browser toolbars, while a portion of their revenue comes from distributing sponsored adverts for others. It is also unclear how the data that the two companies generate might be bound together to produce something greater than the sum of their parts. Moreover, their purported competitors, Google and Facebook, were built to collect data, parse it in real time, and offer personal advertising on a massive scale. Yahoo and AOL are unlikely to be able to compete on this terrain. Armstrong seems to know that it will be a difficult, if not quixotic, quest. “We have to have real differentiation in the future, because there is no doubt in my mind that they are going to continue to gain strength,” he said of Google and Facebook. “The bar for us is to try to stay at that level, but that does not mean [we] have to be them.”

Still, this isn’t an especially expensive gambit for Verizon, which paid only about one and a third times Yahoo’s estimated revenues for this year. If it works out, Verizon will have built a sports car from old parts. If it doesn’t, it gets another relic for its collection, without having given up much.

Om Malik is a technology writer, the founder of GigaOm, and a partner at TrueVentures, a venture fund based in Palo Alto. MORE