Yahoo! Inc

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YAHOO! INC.

As one of the early Internet search engines, Yahoo! enjoyed the benefits of being first to market as it evolved from a search engine to an Internet portal. Yahoo! became a strong Internet brand in its first year of operation. It was the first search engine to develop a commercial look and one of the first to attract online advertisers. While the company has developed alternative revenue streams, it has remained dependent on Internet advertising for the bulk of its revenue.

FORMATION OF YAHOO!

Yahoo! began in 1994 as a database for finding Internet resources. The online directory of Web servers was developed by two Stanford University graduate students, Jerry Yang and David Filo, who had Master's degrees in electrical engineering. Their Web search engine was initially made available to the public on Stanford's Web site, where it was an instant hit. Unlike other search engines that would come along, Yahoo! used hierarchical menus to organize Web sites. Yang and Filo soon took a leave from their doctoral studies to devote themselves full-time to Yahoo!.

Yahoo Corp. was formed in April 1995. Tim Koogle, a Stanford graduate in electrical engineering and mathematics, joined as CEO, and the company had 14 employees. By April 1995 Yahoo had about 200,000 daily users who accessed its search engine. The company obtained $1 million in financial backing from venture capital firm Sequoia Capital. Users could search 40,000 Web pages, a small percentage of the 5 million then in existence.

Yahoo hoped to generate revenue by selling advertising space. Web design firm CKS Partners of Portland, Oregon, was hired to redesign Yahoo!'s interface. On July 31, Yahoo was relaunched as an advertising-supported directory. Five advertisers paid $60,000 each for a three-month contract. They included telecommunications giant MCI Communications Corp., a San Francisco-based startup called Worlds Inc., the Internet Shopping Network, MasterCard International, and online retailer NECX. The only competition at the time was InfoSeek, which began in January 1995. InfoSeek also gained revenue from ads, charging $15 for every 1,000 times an ad appeared on someone's computer screen. Yang expected that competition would soon become fierce.

Analysts noted Yahoo's new commercial look and predicted it would become the model for future services on the Internet. The site displayed a newly designed company logo. "Extra!" news tag added to some headings suggested more informational depth. Computer Weekly predicted, "Eventually, the company may become a one-step site for all the services an Internet user might want."

STRONG BRAND HELPS IPO SUCCEED, 1996

After its first year of operation Yahoo! was the best known and most widely used Internet guide. The company had attracted an additional $4 million in financial backing from Ziff-Davis Publishing Co. and Japanese software giant Softbank Corp. It generated $500,000 in revenue in its first six months. In January 1996 Ziff-Davis and Yahoo! formed a strategic partnership whereby the magazine ZD Internet Life would become Yahoo! Internet Life and the two companies would publish an online guide for computing resources on the Internet.

At the beginning of 1996 Yahoo! provided links to about 100,000 sites. The company tried to list the most important sites. It worked closely with advertisers and supplied them with demographic information and traffic reports. To broaden its perspective, Yahoo! formed a partnership with the Internet division of Canada's Rogers Communications to develop an Internet search service for Canadian sites. Around this time Rogers also launched CANOE, the Canadian Online Explorer, which enabled users to browse online editions of such Rogers publications as Maclean's, The Financial Post, and the Sun newspapers.

Yahoo! held its initial public offering (IPO) in April 1996, selling 2.6 million shares at $13 per share on the NASDAQ. By the end of the first week shares more than doubled to nearly $33. Search engines Lycos and Excite also had their IPOs that same month. Following its IPO, Yahoo! Inc. enjoyed a market capitalization of more than $1 billion. It gained a $106 million investment from Softbank and together the two companies launched Yahoo! Japan, which was the first major directory service to contain language and content for a non-English speaking audience. Yahoo! Japan quickly became the most-trafficked site outside of North America. Softbank owned a 37 percent interest in Yahoo!

Yahoo! and Ziff-Davis International Media Group partnered to launch Yahoo! Europe in the United Kingdom, France, and Germany, with other countries to follow in 1997. In the United States Yahoo! began forming online alliances with local print and broadcast media companies to create city guides that organized and indexed sites relating to each city. The first cities to be covered were New York, Los Angeles, and San Francisco.

Yahoo! rolled out many new services in 1996, including My Yahoo!, a personalized service that delivered content from a user's favorite Web sites and provided other personalized information based on user preferences.

Although it was the recognized market leader, Yahoo! lost money in 1996, and its stock fell by 44 percent. Yahoo! planned to become profitable by turning itself into a media company. As Yang told Fortune, "The fundamental bet we are making is that we are a media company, not a tools company." The company planned to survive by creating brand loyalty.

ADDS SERVICES AND BECOMES A PORTAL, 1997-1998

Yahoo!'s branding efforts resulted in 39 percent of the general public knowing the Yahoo! name, according to a Yankelovich study. To build its brand recognition Yahoo! was the first Internet-only company to advertise on television. New services launched in 1997 included Yahoo! Finance, which included investment research, market summaries, and financial news as well as links to stock quotes, company profiles, and similar information.

By 1997 Yahoo! was posting profitable quarterly financial results, including $210,000 in the first quarter and $610,000 in the second quarter. Revenue in the second quarter more than quadrupled to $13.5 million from $3.3 million a year ago. First-quarter advertising sales were $9.5 million, compared to $1.7 million in the first quarter of 1996. Third quarter revenue reached $17.3 million, with an operating profit of $222,000 and net income of $1.6 million. Traffic reached an average of 50 million page views per day in September. Wall Street took note and toward the end of 1997 analysts were recommending Yahoo! as being financially sound and likely to benefit from increased Internet spending by advertisers and retailers.

During 1998 Yahoo! developed plans for becoming a portal and developing additional revenue streams from commerce and other sources. In mid-1998 the company acquired Viaweb Inc., an Internet commerce software vendor, for $49 million in stock. The acquisition gave Yahoo! the ability to design, build, promote, and host online storefronts and give merchants tracking and reporting tools. The Viaweb Store was subsequently relaunched as Yahoo! Store. Later in the year Yahoo! acquired Yoyodyne for about $30 million in stock. Yoyodyne specialized in target marketing, and Yahoo! would use its resources to develop ongoing promotional programs for its advertisers.

Yahoo! continued to operate at a profit in 1998. For the first quarter it had revenue of $30.2 million and a net profit of $4.3 million. About 22 percent of its revenue came from commerce and sponsorships. Strong traffic helped Yahoo! report financial results ahead of analysts' expectations for the rest of the year. In May Yahoo! led all Internet sites with 30.6 million unique visitors, followed by America Online with 22.8 million and Netscape with 18.9 million. For September average page views reached 144 million, with the number of registered users increasing by 7 million to more than 25 million. PC Magazine named Yahoo! the best Web search engine of 1997, citing its news-searching capabilities and extensively cross-referenced directory. It also praised the company's microsites, including Yahoo! Finance, regional guides, Yahooligans! For Kids, and Beatrice's Web Guide, a partnership with Women's Wire. Yahoo! also featured chat rooms and a free e-mail service. For fiscal 1998 the company's revenue reached $203.3 million, up from $70.5 million in fiscal 1997.

Yahoo! extended its brand in many ways. Globally it operated sites in 11 countries overseas, including a newly launched Chinese-language Web site based in Hong Kong. Like other search engines, Yahoo! offered extra services such as news, yellow and white pages, free e-mail, chat, and instant messaging. The Yahoo! name was also found on its own magazine, Yahoo! Internet Life, and a co-branded Visa credit card. New services launched in 1998 included Yahoo! Small Business and Yahoo! Clubs.

ACQUISITIONS AND NEW SERVICES, 1999-2000

In 1999 Yahoo! enjoyed strong revenue growth and profitability due to its global operations. Its stock joined the Standard & Poor 500 Index. Early in the year the company announced that it would acquire GeoCities, one of the largest domains on the World Wide Web, for an estimated $3.5 to $5 billion in stock. GeoCities hosted personal Web sites and sold ads on those sites. In its most recent quarter GeoCities lost $8.4 million on sales of $7.5 million.

Later in the first half of 1999 Yahoo! made another major acquisition when it paid $5.7 billion in stock for Broadcast.com, a multimedia Internet broadcasting company with the capability to send TV-quality video over the Internet. For 1998 Broadcast.com lost $15 million on sales of $24.4 million. As part of its strategy to deliver content to wireless devices, Yahoo! acquired Online Anywhere in June for about $80 million. Online Anywhere's software would enable Yahoo! to more easily format its content for wireless devices.

Among the many new services introduced during 1999 on Yahoo! were auctions, Yahoo! Radio, Corporate My Yahoo!, electronic bill paying, and Yahoo! Everywhere. A new version of its instant messaging service incorporated live voices, allowing users to talk to each other by pressing a talk button. The company's broad array of services added a great deal of "stickiness" to its site and kept people coming back.

Yahoo!'s fourth quarter profits surged to $57.6 million on revenue of $201 million, due to soaring advertising and e-commerce revenue. During December 1999 traffic increased to an average of 465 million page views per day, compared to 167 million page views per day in December 1998. The company's international operations accounted for 30 percent of its traffic and 13 percent of its revenue.

Yahoo! enjoyed strong revenue growth during the first half of 2000. In the second half of the year the dot.com shakeout began to affect Yahoo!'s advertising revenue as advertisers cut back on their spending. Yahoo!'s mid-2000 acquisition of eGroups for $432 million in stock enhanced the company's e-mail communications services for its online communities.

At the end of the first quarter Yahoo! had 125 million registered users for its personalized services, an increase of 25 million over December 1999. Page views per day rose to 625 million in March. A promotional arrangement with Kmart's Bluelight.com resulted in 1 million new users for Yahoo! With a network of 10,500 linked merchants, Yahoo! claimed that it enabled more than $1 billion of online transactions in the first quarter of 2000.

Even though Yahoo!'s third quarter earnings exceeded expectations, the company's stock dropped 21 percent following its quarterly report. In spite of Yahoo!'s diversification, analysts noted that page views and site traffic were the most important factors driving the company's revenue. In the first half of 2000, advertising accounted for 91 percent of Yahoo!'s revenue, with business services accounting for the other 9 percent. In the third quarter the company's merchant and advertising base fell to 3,450 from 3,675 in the second quarter.

New services launched in 2000 included the Yahoo! B2B Marketplace, a site designed to help companies find products and suppliers by serving as a portal to other vertical trading communities. Targeting enterprise customers, Yahoo! introduced Corporate Yahoo!, an enterprise information portal that would contain both Yahoo! content and corporate data. Corporate Yahoo! included personalization features taken from the My Yahoo! service for consumers.

During the year Yahoo! upgraded its instant messenger service to let users conduct hands-free conversations by eliminating the talk button. Conversation links were also added to news stories to enable people to talk to other users about a particular story. Yahoo! Finance Vision was a new site that incorporated video interviews, original production, and editorial content from other providers, all on one Internet page.

Consumers interested in conducting their personal finance transactions online were introduced to a new account aggregation service on Yahoo!, where they could consolidate their banking, credit card, investment, and other financial account information using Yahoo!'s online banking center or its My Yahoo! personalization tool.

Yahoo!'s communications initiative and its Yahoo! Everywhere program converged when the company began offering free voice-based services that included Internet content over the telephone, voice mail, and long distance calling. With Yahoo! by Phone, users could call a toll-free number to check e-mail, weather, news, and other information. Yahoo! Mail was expanded to include voice mail, while Yahoo! Messenger was extended to include the ability to make free PC-to-phone calls.

WEAK AD MARKET RESULTS IN QUARTERLY LOSSES, 2001

Further weakness in the online advertising market affected Yahoo!'s financial performance in 2001. Several stock analysts downgraded the company's stock at the beginning of the year. After a year-long slide, Yahoo!'s stock had lost 90 percent of its value. Profits for the first quarter were down 87 percent from a year ago, and second quarter losses of $48.5 million were accompanied by reduced earnings forecasts. In March chairman and CEO Tim Koogle gave up his CEO title but remained as chairman. Terry Semel, a former entertainment executive who was once co-CEO of Warner Bros., was hired as the new CEO. In April the company laid off 421 employees, some 12 percent of its 3,510 workers. Co-founder Jerry Yang noted that Yahoo! was in a transition from a period of tremendous growth to one of long-term growth in a volatile economy. To sustain that growth Yahoo! sought to balance its revenue from advertising, e-commerce, and services. One analyst speculated that Yahoo! would begin charging subscription fees for services such as multimedia content, enhanced financial services, and enhanced instant messaging.

In an effort to boost revenue and develop new revenue streams in 2001, Yahoo! Auctions began charging listing fees in January. In February it introduced a Sponsored Sites program for B2B and shopping, whereby paid listings would appear in some search results. Later in the year Yahoo! began charging U.S. customers for domestic voice calls made over the Internet as part of an updated version of Yahoo! Messenger. Yahoo! also expanded its B2B efforts by introducing three Industry Marketplaces for computer hardware, software, and electronics.

The addition of multimedia services also appeared to be a key part of Yahoo!'s plan to develop new revenue streams. The company began using streaming media to encourage online shopping on Yahoo! ShoppingVision and entered into a strategic relationship with ValueVision International, the third-largest home shopping network. Yahoo! also added video to its instant messaging service, which ranked third behind America Online and the Microsoft Network. Yahoo!'s $12 million acquisition of Launch.com added streaming music videos and music news as well as an Internet radio station. Yahoo! also entered into a wide-ranging agreement with Sony that included online movie marketing, e-commerce, and Web site development. For corporations, Yahoo! introduced Yahoo! Broadcast Services to give them Internet broadcasting capabilities for videoconferencing.

Despite its financial woes, Yahoo! continued to be one of the most popular Internet destination in 2001. In March it was the number one Internet property in terms of both page views and unique audience, ahead of such sites as eBay, Amazon.com, America Online, the Microsoft Network, and the Lycos Network. According to a mid-2001 study by Jupiter Media Metrix, Yahoo! was one of four Internet sites that accounted for more than half of all the time spent online by Internet users in the United States. With more than 192 million registered users as of mid-2001, Yahoo! had more people using its site than any other company.