Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.
— Macbeth (5.5..24-28)

Where were you in 1995?

Right. Most of you weren’t.

And while the world was waiting for you, it was trying to get its head around another newborn. Something called Yahoo!

Jerry Yang and David Filo were studying at Stanford. And the Internet was in its infancy, at least from a consumer perspective. It actually was created back in 1960s, but it largely was the realm of geeks and military types until the early ’90s, which services like CompuServe, Prodigy and America Online started to emerge. They grew out of BBS, or bulletin board, services, that allowed computer users to dial into a computer. We had one at The Albuquerque Tribune that we called the Electronic Trib.

Here’s a bit of foreshadowing for this story. The Albuquerque Tribune no longer exists. Nor does the Rocky Mountain News, nor the Birmingham Post-Herald. In fact, no daily newspaper I worked for still exists. Not one. And while it’s tempting to see that as a specific comment on the negative impact I’ve had on the profession, the problem was much larger than that. Between 1990 and 2011, we lost about 300 newspapers, a decline of about 18%. A major driver was disruption. Widespread, industry-changing disruption.

But we’re getting ahead of ourselves. Back to 1995 …

Yang and Filo are trying to figure out the Internet. They’re not alone. The large services inspired by a BBS ecosystem are starting to create portals allowing their users to surf the Internet. So instead of dialing into, and being confined within, a single computer in a single location (a BBS, or bulletin board system), users are now able to dial into a freeway that feeds into myriad computers strewn across the world.

Welcome to the World Wide Web.

As with any nascent business, there are growing pains. One of them is the mess that is starting to unfurl on the Internet. There’s a lot of stuff out there. How do you find it?

This question seems ludicrous today. You just Google it.

But Google didn’t exist. It’s still another two years before they enter the picture. And you still don’t exist. Talk about late to the party.

Two other geeks, Larry Page and Sergey Brin, are also at Stanford. They’re also obsessing about this World Wide Web thing. And they’re trying to figure out what to do with it.

We didn’t realize it at the time, but we were on the verge of a massive disruption. (There’s that word again. Get used to it. We’ll be hearing it a lot this semester.) A new technology capable of undercutting the business models of existing businesses and changing the way we do things. A Harvard professor named Clayton Christensen studied myriad businesses that went from a position of strength and power to greatly diminished prospects. Christensen saw a trend that repeated over and over.

Disruption: a case study

Here’s what happens, in a nutshell:

An incumbent business is chugging along. Think about the newspaper industry in 1995. It was pulling in about $50B in revenue per year. It faced relatively little competition. Remember Mark Twain’s admonition against starting arguments wait people who buy ink by the barrel? That’s a nod to the fact that there was a massive barrier to entry if you wanted to compete with — or argue with — a newspaper. You need lots of ink and paper and big iron printing presses. That ain’t cheap.

Now some upstart emerges. It’s much smaller. It’s not nearly as high quality as the incumbent. But it’s riding on a technology that allows it to do things differently. To upset the apple cart, if you will.

A key thing to remember here is that this upstart usually is of lower quality than the incumbent. But it’s also cheaper. And it’s offering something that cherry picks a key part of the incumbent’s business. Remember: If you’re just getting started, taking something that represents a relatively small slice of the pie can go virtually unnoticed by the sector at large. But it’s a pretty big deal for the startup.

How many of you have heard of Craigslist? Anyone use it?

Craigslist was one of these upstarts. Craig Newmark looked at the newspaper industry and realized a key part of their business resided in the classifieds.

In many ways, the classifieds were an immensely effective business. They brought buyers and sellers together quickly and elegantly.

Looking for a job? Buy a newspaper

Looking for a home:? Buy a newspaper.

Looking for an apartment? Looking for a used 35mm camera? How about a new or used car? Newspaper. Newspaper. Newspaper.

Of course TV was getting some of these dollars. And there were free shoppers around that also nipped at the newspapers’ heels. But there was no one who could supplant them. Who could set up printing presses and offer advertisers the ability to reach 40, 50 or 60 percent of the market with a single buy?


Craig looked at this and decided to start a platform allowing people to buy and sell. It started as an email exchange where subscribers could find out about events in the San Francisco area.

Not coincidentally, this is happening around 1995.

And what happens next is classic disruption. The users of Craigslist start by passively receiving notes from Craig about upcoming events. But the list is unmoderated. So they begin using it to solve their own problems. Looking for a job? Trying to find an apartment? Trying to sell a couch? Ask the folks on the list for guidance/suggestions. And it snowballed from there.

Ultimately, it morphs into a listing of things for sale. While it’s changed significantly, it’s still pretty much as it was back in the day. It was pretty low-end. The technology was just OK, at best. The design was utilitarian. But Craig saw an opportunity to disrupt an incumbent business that was worth a lot of money. Billions, in fact. And all Craig needed was to figure out how to shave a small fraction off of that to create a really sweet little business. Think about it. If he could grab just 1 percent of the $13.7b newspaper classified business in 1995, he’d be doing really well — to the tune of $13m.

So how does he get mass adoption for his product when he’s competing against an established market dominated by newspapers. He gives it away. Yup. Free. Just gives it away.

This is critical. Because newspaper classifieds weren’t cheap. The industry was running what was in effect a monopoly and knew it could pretty much set the terms for playing in this marketplace that its presses and ink made possible. Craig had a pretty cool idea. But if post a note on Craigslist seeking to sell your slightly used widget and no one is there to see it, what good is it? How do you crack that nut?

Free. Once Craigslist started offering consumers the ability to solve a job they needed to get done — to buy and sell used merchandise — at a cheaper cost than they previously were paying, it started to snowball and gain mass. As users poured in, the marketplace grew more effective. And Craig realized he could charge a modest fee for posting certain highly valued types of ads.

Think apartment rentals and jobs. And adult-only ads, which have been a source of legal problems due to prostitution solicitations.

So if you’re the newspaper industry, how do you react?

Craig is more of a mosquito at this point than an F-15. He’s nipping at categories of classifieds that are really pretty low margin (profit) for you. Newspapers made most of their money from real estate agencies, auto dealerships and employers. If you wanted to sell a home, sell a car or hire for a job, the newspaper was the most comprehensive marketplace available. They kinda had you. And they charged you for it. Private party ads — ads where consumers are selling couches and cameras and merchandise to each other — tended to be a much smaller part of the newspaper’s pie.

During myriad meetings in the late ‘90s and early 2000s when I was a newspaper executive, we looked at a lot of classified rate cards. You guys know what Byzantine means? Insanely complex. Private party paid one price. Businesses paid another. Local businesses paid a third. National a fourth. And there were myriad add-ons that would give your ad more prominence, and cost more money. Want it bold? Want it in larger type? Want it with borders and background to make it pop? No problem. But it’ll cost ya.

So when Craig comes in chasing a sliver of the business that newspapers don’t value highly anyway, with a product that’s kinda downscale, there’s some bluster, some whining, but not much of a reaction. After all, Craigslist isn’t much of a marketplace for cars and autos and homes. It’s best suited for private party ads. I want to sell my bike. Or my canoe. In 1995, these private party ads represented about 12% of the $13.7B newspapers earned from their classified products. And while this isn’t chump change, it’s not the family jewels. The sales force isn’t really focused there.

And private party classifieds begin their migration from print to online.

Craig doesn’t need to buy printing presses. He doesn’t need to buy ink. He creates infrastructure on the Internet — and not terribly complex infrastructure at that — and he’s off to the races. He doesn’t have massive legacy costs to cover. And he doesn’t have massive legacy attitudes that stop him from doing things very differently than they’d been done before.

So it doesn’t take too long for Craig to corner the private party ads and start moving in on more lucrative ad types.

So again, how should the newspaper industry have responded to this?

Were they idiots for not coming out with a product to compete against Craig for the get-go? Why would they be so stupid?

The Innovator’s Dilemma

This is the question our Harvard boy, Clay Christensen, is trying to answer with his groundbreaking book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail .

Make note of the subtitle. It’s important. These incumbent businesses aren’t stupid. In fact, they do what good businesses are supposed to do. They talk to their customers. They innovate. But their innovations tend to be sustaining. And when they’re making their existing products better, incumbents have a very tough time competing.

Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. Source.

But when it comes to disruptive innovations. Different story. Because the startup has an advantage here. It’s more nimble, less beholden to existing business models and prejudices. It can attack market segments that aren’t worth the incumbent businesses’ while or where the incumbent isn’t really focused. They can come in with lower cost — albeit lower quality — products that solve a specific problem. More importantly, they often create products that create entirely news consumer demographics.

In contrast to disruptive innovation, a sustaining innovation does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other’s sustaining improvements. Source:

In other words, once classifieds become free, once they become accessible without buying a newspaper, new customers emerged. Private party ads were fairly limited in the newspaper universe. You’re not going to spend $5 to sell something that’s worth $3, right? But if the cost of sale is suddenly nothing, it starts to make sense. So a marketplace you wouldn’t even have considered previously, suddenly is enticing.

Who cares of the site is kinda gray and straightforward? Who cares if (at this point) it doesn’t offer as much reach? It’s free. And it’s growing. And when you try to sell something, you get results.

So let’s look back at those newspaper executives. What are your options?

Well, let’s talk to car dealers. And we do. And they tell us they need the reach and frequency of daily newspapers (even though they despise us for extorting money from them via our monopoly standing). Same with recruiters Same with car dealers. Craigslist intrigues them. But it’s still a cut-rate, low-end marketplace that is very, very niche. Remember: it’s the late ‘90s. Only 14% of the population is on the internet. About 40% of the market is reading newspapers. If I’m trying to sell something with a $20k price point, I want to reach as many prospects as possible with my ad. In addition, advertisers are as conservative and backward as the legacy media companies serving them. This whole internet thing feels newfangled and strange. So they’re not necessarily acting in their best interest. Want proof? Advertisers still spend a disproportionate share of their ad money on print when print’s share of audience attention is a fraction of what it once once. It’s habit. And familiarity. And fear of change.

So our advertisers don’t seem too tweaked.

Now let’s talk to our ownership. And if you’re a public company, that ownership is stock holders. Investors. They bought your stock for a reason, believing it will grow and make them money.

So we go to our investors — represented by a board of directors — and we say: We see this threat emerging. A guy named Craig Newmark has created a classified marketplace that’s free. And it’s targeting our low-value customers now, but we’re afraid Craig will start moving upmarket. What if he starts charging? What if they offer apartment or employment ads that cost a fraction of what we’re charging and steal this from us. We need to respond.

Let’s create our own free marketplace.

And after we pick ourselves up off the floor after being slapped by our investors, we realize the folly of that idea. Even in decline, our classifieds are worth billions.

How do you forgo billions for the promise of owning a marketplace that doesn’t produce significant profit or revenue yet, which early Craig was in the midst of?

You don’t. Pure and simple. You start hatching sustaining innovations, offering your classifieds online with features and functionality that Craig doesn’t or can’t. But we’re still not free. We’ve cut our prices. And in some instances we’ve started giving away Private Party (mostly after that horse was already out of the barn).

The newspapers did not sit on their hands while this was going on. They innovated. Not disruptive innovation, but sustaining innovation. They launched products like, which proved fairly effective, and products like PowerOne Media, which was an abject failure. But if Christensen is to be believed, they really didn’t stand a chance against this disruption. Very few incumbents manage to navigate this.

But what does all of this have to do with Yahoo?

Yahoo: The early years

Try to imagine a world where Google didn’t exist to answer you’re every question, complete your every search. That’s what it was like in 1994. There were search engines, of course.

Every hear of Gopher? Or Archie? How about Veronica or Jughead? The latter two were spawned by the folks who built Gopher.

I didn’t think so. They’re examples of the search engines available while Yang and Filo are kicking around ideas in their Stanford skunkworks. And here’s an example of why 1994/95 is kind of a big deal. Here are other search engines that launched that year:

Infoseek. AltaVista. The World-Wide Web Worm. Webcrawler. Yahoo. Lycos. Source:

AltaVista, to my recollection, was the big dog, the one that consistently was returning the best results. But this surge in activity suggests there was a job to be done, as Christensen would say. World Wide Web users needed a way to figure out what was out there. As more and more info flowed onto the Internet, the chaos grew more difficult to slice through.

So Yang and Filo decided they’d help you find what you’re looking for. And they did it using a curated listing of key sites. They weren’t trying to include everything. They were focusing on the best things, the ones worth of your notice. And it took humans to scour the Internet, sort it all out and present it to users in a digestible form. And they did a great job.

Of course, it didn’t start as Yahoo. It launches as Jerry and David’s guide to the World Wide Web. It’s rechristened Yahoo in March 1994.

Why Yahoo? It’s a backronym for “Yet Another Hierarchically Organized (NYTimes says “Officious”) Oracle.” (And you also just learned the word “backronym.” It’s gonna be a great semester …)

Yeah. That.

By 1998, Yahoo is the top way people enter the Internet, racking up about 100m page views per day. It had become the homepage for the Internet.

“People tend to think of this as a point of aggregation, where we tend to think of it as way of a building a network of different sites and different ways in which people can approach different content without having to go through one single point. — Jerry Yang, 1998 Source:

That’s a big deal. And the quote above gives a hint of where Yang was pointing Yahoo. He’s describing the types of initiatives large content companies were embarking on, cobbling together myriad content niches and audiences. It’s not long before Yahoo! boasts myriad “verticals.”

But something else happened in 1998. Another pair of Stanford geeks, Sergey Brin and Larry Page, have launched Google, a web crawler that leverages an innovative Page Rank algorithm to decide which results to return first. Sounds simple, but it’s really complex. At its base, Google was looking at how many pages were linking to and linked from a given page, using that as a means to figure out what pages readers were most interested in.

So at this point, would you describe what Yahoo is doing as disruptive or sustaining?

By 2000, Yahoo is rocking a $125b market value and is the world’s most trafficked website.

So what’s happening here? We have a startup that grew to become a market leader. It became an incumbent business. Guess what? That put a target on its back. The disruptors saw a mark and started to figure out how to unthrone Yahoo.

Meanwhile, over at Google …

The search problem still hasn’t been solved. Yahoo’s strategy is useful. Very useful. But it doesn’t really solve the problem of how to find something obscure, something that curators at Yahoo would never consider.

And as I’ve already noted, there is no lack of options, the primary of which was AltaVista. Remember that Page Rank thingy I mentioned a bit ago. This is where it becomes critical. Essentially, the algorithm Brinn and Page cooked up smokes the competition. Spammers had already learned how to game the search engines, forcing results for their pages to rise above others. The Google algorithm tended to produce cleaner, more relevant results. But as far as the business model goes, it was stuck in the same mire as everyone else. Brinn and Page half-heartedly allow a few ads on their search pages after having written a dissertation arguing against an “advertising funded search engine” model.

But without revenue, this all becomes moot. You have to pay your employees. Tech costs. Etc.

Then the true disruption hits. To this point, Goole mostly is creating sustaining innovations. Damn good ones, but sustaining nonetheless. They’re riffing on search engine technology and coming up with schemes that seem to be working. Then they hit gold.

Ever hear of I didn’t think so. It was a pay-for-placement search service that was doing its own innovation, including a scheme that allowed advertisers to bid their way to the top of search results. By 1998, advertisers were paying up to $1/click.

Google was watching. They copied the model, creating their AdWords product. This is where the disruption begins. While the rest of the internet is selling ads on a CPM basis (cost per thousand impressions), Google is finding inspiration in the model and creating an ad ecosystem that changed the world. But it tweaks it. Google adds a new twist on the auctions, where the highest bidder rises to the top. But what happens if the ad sucks. And no one clicks on it. So Google starts tracking clickthrough rate, and the more an ad is clicked, the higher it rises in the algorithm. So a lower bid that garners more clicks will end up at the top of the page. That paved the way for Google to go PPC (pay per click).

But whatever happened to

Well, Yahoo also was watching things unfold, and it acquired (which by then was called Overture, after gobbling up AltaVista and AlltheWeb). In 2003, Yahoo realized it had missed the train and acquired Overture for $1.63b.

Wither Yahoo?

So what happened? Why did Google soar while Yahoo stagnated, then crashed and burned? Look at the stock chart above. It’s brutal. This is a world-class ass kicking. Were the folks at Yahoo stupid?

Some of it can be traced to each company’s roots. Google put its faith in technology to solve the problem at hand while Yahoo used human curation. Why Yahoo eventually shifted away from the curation model, culturally it never really did. Remember that quote above by Yang? “A network of different sites.” Yahoo saw itself, first and foremost, as a content company. Googles founders and original CEO, Eric Schmidt, were all engineers. Schmidt was at Google from 2001 until the present. Yahoo, meanwhile, had six CEOs from 1995 to 2012.

After the dot.bomb of 2000, Yahoo’s stock price plummeted 93% over the next 20 months. It’s first CEO, Timothy Koogle, bails. Terry Semel steps in, and he starts positioning Yahoo as more of a content company. Not surprising given his past as a former executive at Warner Bros.

By 2002, it was Google’s game. They had risen while Yahoo had gone adrift. It never really recovered. Roots clearly had something to do with it. But there was a bigger problem at play. One our friend Clay Christensen warned us about in The Innovator’s Dilemma.

Yahoo was innovative. No doubt about that. It launched a Brickhouse lab in 2008 specifically as a skunkworks. It launched the web application Pipes, which let developers quickly and easily cobble together useful web products and services as web applications. But there was a dilemma. There’s always a dilemma:

Yahoo drove a lot of traffic and revenue, even after it no longer was No. 1. In fact, from a traffic standpoint, Yahoo continues to rank among the top on the Internet. By some accounts, it’s still in the top 5.

But as a Variety article noted in analyzing the recent Yahoo/Verizon deal:

But all of that commitment to innovation only went that far. Yahoo was immensely protective of money makers — the homepage with its billion monthly active visitors, Yahoo Mail and other legacy properties. With the exception of Flickr, none of its new acquisitions was ever turned into a core Yahoo product, or in any meaningful way exposed to Yahoo’s huge audience.

At the same time, Yahoo wasn’t content with just leaving those startups alone. Instead, it forced them to adopt some of the technology that Yahoo was using for its own properties, leading in some cases to huge migration projects, only to invest little into new feature development after that.

In 2008, Microsoft makes an unsolicited offer to buy Yahoo for $45b. It is rejected.

In 2012, Yahoo is adrift. It’s strategy is messy. It needs a major turnaournd. So it hires Marissa Mayer, a Google exec, to try to right the ship. She tries to create more focus for the company, and uses a series of acquisitions to try to inject new life and product. She acquires Tumblr for $1.1b in 2013. But by 2016 Yahoo already was doing a write-down on its Tumblr asset, slicing about $230m from its valuation.

Here’s the incredible irony in Yahoo’s end game. It turns out an investment it made years ago in a Chinese search company turned out well. Really, really well. In fact, it became Yahoo’s most lucrative asset. While Yahoo at large was valued at $3b to $8b in 2015 (that price ends up being $4.6b when Verizon acquires the company). It’s stake in Alibaba was worth about $32b. To rub salt into the wound, we also should note that the $4.6b is chump change compared to the Alibaba stake and its 25% stake in Yahoo Japan Group. Those will stay in a separate stock. What Verizon acquired for $4.6b, in essence, is all the content stuff. The two choice investments aren’t included. SO technically Yahoo doesn’t disappear. But it’s really going to become a holding company for stakes in other companies at this point. It appears the Alibaba stake ultimately will be sold back to the parent company.

Yahoo falls from the top of the heap. Not because it’s stupid, but because it faced disruptive changes in the Internet ecosystem that it was largely incapable of responding to. Google figured out advertising and search. Facebook figured out social media. Yahoo painted itself into a content product corner, which is the part of the room the Internet has savaged the most viciously.

Yahoo’s missed opportunities

  • 1998 Yahoo turns down opportunity to buy Google’s Page Rank for $1m
  • 2002 Yahoo tried to buy Google for $3b. Google was more realistically valued at $5b. But Semel wouldn’t consider going higher.
  • 2006 Yahoo forms consortium with newspapers
  • 2008: Yahoo refuses to sell to microsoft for $45b
  • 2016 Yahoo sold to Verizon for $4.6b

The Peanut Butter Manifesto

“If you’re everything, you’re kind of nothing. The sad reality…is it never solved its core identity crisis.” Brad Garlinghouse, former Yahoo exec who wrote The Peanut Butter Manifesto in 2006. Peanut Butter because he believed the company was spreading itself too thin.


(I wrote this in an attempt to structure the first several lectures in two classes I’m teaching at Ohio University in the Fall 2016 semester. Most of it was written in a white heat, and I went back afterward to fill in facts and details. If you see something that’s wrong, unclear or just stupid, email me and I’ll address it.)