YAHOO! internet business models text and cases Donatas Sumyla
YAHOO! BUSINESS ON INTERNET TIME
Overview • Introduction • Company History • Goals and Strategies • GBF • 20-20 Hindsight
Introduction In 1999 Tim Koogle, CEO of Yahoo!, Jerry Yang, co-founder of the company, and Jeff Mallett, the president, gathered to discuss the unusually hectic beginning of the year. Reasons for that being Yahoo!’s competitors’ partnering with major media companies, telecom providers, etc. Ongoing partnerships: • @Home with Excite; • AOL with Netscape; • Disney with Infoseek;
Mission and vision The company aimed to be “the one place in the world that anyone would need to go to find anything, locate anybody, or buy anything.”
History & Facts • April, 1994: Started as a hobby of David Filo and Jerry Yang (Ph.D. candidates in Stanford’s Electrical Engineering Department) as a way to keep track of the addresses of interesting web sites being sent to them by friends. During 1994 it was converted into customized database designed to serve the needs of thousands of users throughout the close-knit web community. • March 5, 1995: Incorporated Yahoo! as a business and hired new CEO Tim Koogle (the 6th employee).
History & Facts (cont.) • The new CEO and the rest of the team saw Yahoo! not as a search engine, but as a modern media company, comparable to a television network or film studio. • By August, 1995, Yahoo!’s managers developed: • a team of engineers building backend databases; • a distributed sales force attacking the important media markets; • a small group of corporate marketers establishing the Yahoo! brand name;
History & Facts (cont.) • During 1996 and 1997 Yahoo! added more: • Content; • Classifieds, chat rooms, news wires; • Commerce; • Popular shopping categories; • Communication; • Free email; • Community offerings; • Country-specific and city-specific sites;
History & Facts (cont.) • Yahoo!’s site traffic grew from approx. 23million page views per day to over 167million page views in 1998; • The number of companies buying ads rose from 550 to 2,225; • The company’s market value stood at $30billion, up 2,600% since its IPO in April, 1996; • Revenue in 1998 was $203million and had projected growth to $362million in 1999;
Yahoo!’s Properties • Navigation properties: • Helped consumers find relevant info more easily by distinguishing between so-called “search-and-browse” areas and properties that Yahoo! programmed itself. • Community properties: • Helped consumers connect and communicate by providing free e-mail or usage of a personal address book from any Internet-connected computer. • Personalization properties: • Could be customized by a consumer to satisfy his or her personal interests.
Yahoo!’s Properties • E-Commerce properties: • Properties like shopping, travel, and real estate were organized and coordinated by Yahoo!, but partners actually carried out the sales. • International properties: • Targeted users and advertisers in different countries outside the US.
Competitors • Companies combining Internet access and content; • AOL/Netscape, MSN, @Home/Excite. • Portals with traditional media partners; • Disney/Infoseek, NBC/Snap. • Independent portals; • Lycos Network, AltaVista. • Vertical sites; • Websites that featured in-depth information and electronic commerce tailored to special interests (CNET, ZDNET, ESPN SportsZone, etc.)
Key Stakeholders • Customers: • Non-paying web users who come to portal’s website to use its services; • Paying companies that market products or services to the users; • Employees: • Yahoo! consisted of enthusiastic Stanford graduates under the age of 30 and most of them had stock options as well as a base salary. • Partnerships: • Yahoo! received much of its information content for free but sometimes the providers would receive a share of the advertising revenue generated by the information which varied from 7.5%-15%.
Operations 3 groups: • Property development; • Marketing and sales; • International;
1. Property development • Production; • Yahoo!’s properties; • Engineering; • Technical tasks, data feeds, content delivery; • Surfing; • New web sites’ surfing, directories updates in Yahoo!’s search;
2. Marketing and sales • Corporate marketing; • Developing the Yahoo! brand name by mainly focusing on spot television advertisements; • Sales; • Sold advertising inventory on Yahoo!’s 167million page views per month. • Business development; • Arranged Yahoo!’s numerous partnerships with other firms and dealt with the incoming partnership offers.
GBF • Yahoo! followed a “get big fast” strategy; • Network effects fairly strong; • None with search or content aggregation (which together represent 2/3 of users’ time with portals); • Strong with chat, instant messaging, auctions, games, communities of interest;
GBF • Scale economies are very strong; • CPM (cost per thousand) premium for reach; • Variable costs are only about 15% of revenue; • Customer retention rates are not very strong; • Some retention via network effects; • Modest opportunities for differentiation, since most content and features are provided by third-parties; • Modest switching costs related to investment in data entry (e.g., customization of home page; calendars; bill payment service; etc.)
GBF • Lifetime Value of a Yahoo! Customer: • Revenue = $8 per user per year; • Variable contribution margin 85%; • Average life of customer relationship = 5 years; • Average advertising expense per new user = $3;
Issues Facing Portals • Payoff from vertical integration; • Viability of competing models: • Free access (NetZero; AltaVista); • Better navigation (GoTo.com; Google; AskJeeves; About.com); • Destination sites usurping portal functionality; • Maturation of the user and advertiser bases; • Portal disintermediation of commerce sites; • Broadband discontinuity;
Taking the next step • Development of recent mergers and partnerships; • Yahoo! Team had to decide whether and how to adjust their own stake; • Yahoo! needed balanced adjustment and continuity in its new business plan; • Number of suitors were interested in a partnership or merger; • Yahoo! was already in acquisition discussions with the management of GeoCities;
Taking the next step • Despite the many changes and opportunities in their business, Yahoo!’s senior managers remained focused on a handful of priorities; • “As a company, we’re heavily externally focused. We maintain a level of paranoia about the environment that is pretty healthy, and we seldom actually get surprised. If anything tectonic is going on, Jerry, Jeff, or I get word of it before it occurs. When that happens, we come back to fairly basic fundamentals. Are we still doing the right things?” Tim Koogle, CEO
Summary • The future of the company is promising; • Reasons: • Smart and enthusiastic management team always aware what is going on and focused on doing only the right things; • Interest of large media and telecommunication companies willing to merge with Yahoo!. • GBF strategy;