Monday, May 27, 2013

Yahoo: Still searching for profits on the Internet (Fortune, 1996 ...

Editor's note:?Every Sunday we publish a favorite story from?our magazine archives. With the news that Yahoo acquired blogging platform Tumblr for $1.1 billion this week, we present a 1996 feature on how search companies were struggling t0 make money after big IPOs. Let's look back on a time before "Google" was a ubiquitous verb and a major player in search.

By Janice Maloney

yahooFORTUNE -- Ninety million pages. That's almost as much text as is stored in the Library of Congress. It's enough paper to go from L.A. to Bangkok and back. It's the contents of the World Wide Web--or at least it was a second ago. According to Forrester Research in Cambridge, Massachusetts, almost 170,000 pages are added to the Web daily. PC owners worldwide are playing digital show-and-tell, publishing text, pictures, and audio about their companies, themselves, and the secret lives of their dogs.

Search companies promise to be your digital Sherpas, guiding you through this glut of data. The leaders--Yahoo, Infoseek, Lycos, and Excite--basically index and catalogue the Internet using a combination of technology and human know-how. Web travelers visit these companies' sites to request the location of data on the Net. Different sites return different kinds of information--a Yahoo search on "Irish whiskey" gives you a broad index of whiskey Web locales, as well as four links to specific sites; Lycos brings back 99 links. Because of the Web's chaos, search sites have become among the most popular stopping points on the Net--Yahoo alone gets up to two million visitors a day. To turn that cachet into cash, the search outfits charge hefty fees for advertising banners that span the tops of their Web pages. Their clientele reaches well beyond Silicon Valley--companies like Nissan, Mastercard, and Sharper Image have helped the four search companies rank among the top ad sites on the Web. That's why search companies became investors' digital darlings. Yahoo, Infoseek, Lycos, and Excite raised $170 million by going public this year.

But like a lava flow off Mount St. Helens, the explosive growth of the Internet constantly redefines the landscape of cyberspace; it demands that companies adapt their strategies almost daily or be buried in ashes. In the short time since the search companies went public, their business plans have become obsolete. Search has become a commodity--there are now more than 200 ways to find and retrieve information in cyberspace. Worse, Internet advertising doesn't seem to work. The search companies are generating paltry revenues and losing money. In their most recent quarters, the four had combined revenues of $16.2 million--and a combined loss of $16.4 million.

Wall Street has reacted as you might expect. Excite went public on April 4, and at the end of the day its shares sold for $20; as FORTUNE went to press, they were trading at $6.50, a drop in value of 68%. Lycos's shares are down 47% since its IPO; Yahoo's are off 44%; and Infoseek's, down 31%.

What went wrong? Advertisers pay Website publishers between $10 and $100 for every 1,000 "impressions," jargon for the number of times a Web page is loaded. But showing results in cyberspace is more difficult than promised by promoters of Net advertising, who hyped the Net as the ultimate medium for one-to-one marketing, or digital direct mail. Jeff Bezos, CEO of the virtual bookstore Amazon.com, advertises on all four search sites--but he believes his print ads, in publications like the Wall Street Journal, are what bring in the business. "If you see the ad in print several times and then see the banner on a Website," he says, "you might decide to buy something. But when the advertising's just Web-based, it's not crystal clear to the viewer that this is a real business. There are no products in the window, no other customers, no proof you are giving your credit card number to a real company."

That helps explain why advertisers have balked at committing dollars to Internet campaigns. Of the estimated $174 billion that will be spent this year on advertising in the U.S., just $312 million will go to Net ads, according to Jupiter Communications in New York City.

The fact is, Yahoo, Infoseek, Lycos, and Excite are just four among hundreds of Websites that carry advertising. And skeptics now question why anyone ever thought search sites would be effective locations for ads. Sure, they draw tons of traffic. But the very charter of a search site is to get visitors in and out as quickly as possible. To expect young squires to linger over a Lexus ad while on a vision quest to discover Pamela Anderson Lee's most recent endowments seems, well, a bit optimistic. Furthermore, in the nerdy rough-and-tumble of cyberspace, several software companies, including Quarterdeck and Symantec, seem to be doing their best to eradicate the search companies' chances of making money on ads. They've introduced ad-zapping software that lets users comb several search sites simultaneously without ever having to encounter an ad, or even a search company's logo.

No wonder the search companies have resorted to strategies far different from the ones they started with. They're recasting themselves as digital destinations, loading up their sites with content and software that will tempt visitors to linger--and read the ads. Some are mutating even further, diversifying feverishly in an effort to adapt to the Net's ever-changing environment.

exciteStill, the consensus among analysts is that only a couple will survive. "A shakeout is in the offing," predicts Jupiter's Patrick Keane. Steve O'Leary, managing director of Broadview Associates in Fort Lee, New Jersey, agrees: "I think we are likely to see merger and acquisition activity among these companies." The game among analysts is to pick the survivors, and maybe even a winner. Though the company's stock price scarcely reflects it, many now view Yahoo as the brand to beat.

Just two years ago, Yahoo was little more than the pet project of two Stanford University Ph.D. candidates who lived in a trailer. In 1994, co-founders Jerry Yang and David Filo were supposed to be doing research on the computer-aided design of semiconductor circuits. Instead, they whiled away the schooldays creating a directory that catalogued Websites according to a filing system they made up (Dewey would spontaneously combust if he saw it). They published their directory free on the Web, calling their site Jerry and David's Guide to the World Wide Web.

Net-heads flocked to the site, and Filo and Yang gave up their doctoral studies to concentrate on expanding the guide, which they renamed Yahoo (for Yet Another Hierarchic Officious Oracle). In April 1995, they raised $1 million in venture funding from Sequoia Capital, and moved out of the trailer and into a real office in Mountain View, California. One year--and one wildly successful IPO later--the two were worth $132 million each. Today, Yahoo employs more than 120 people. Topping the list is President and CEO Tim Koogle, 45, a veteran of Motorola. Koogle, one of the few graybeards in the office, runs the business, freeing Yang, 28, to glad-hand the press and investors. Filo, 32, as chief Yahoo of technology, remains shackled to the company's servers--he insists he has no life outside Yahoo.

At the start, the strategy was simple: Push the brand. Luck helped--Netscape's Marc Andreessen was so impressed by the Yahoo directory that, back in January 1995, he made Yahoo the default directory for Netscape's Navigator browser--users who clicked on the Net Search button at the top of their browser screen were automatically routed to Yahoo. The arrangement ended last December--Netscape now charges five search companies, including Yahoo, $5 million a year each to rent space behind the Net Search button--but it helped make Yahoo famous on the Web. The service now daily receives up to two million visitors, who access the site 14 million times. According to Jupiter, more than 75% of those visits come from individuals who have bookmarked or otherwise chosen Yahoo as their search site.

Still, Yang and Filo know that owning a brand name that wins repeat search visitors isn't enough. "The fundamental bet we are making is that we are a media company, not a tools company," says Yang. "If we are a tools company, we are not going to survive. Microsoft will just take over our space. If we are a publication, like a FORTUNE or a Time, and we create brand loyalty, then we have a sustainable business."

Yang's push to turn Yahoo into a brand that stands for more than searching will be helped by the company's alliance with Softbank, a Japanese media conglomerate. Last April, Softbank added to its burgeoning Internet portfolio by paying $106 million for a 37% stake in Yahoo. Yang has launched two brand extensions that stem directly from the partnership. Ziff-Davis, a trade-press publishing company Softbank owns, is putting out a print magazine called Yahoo Internet Life and creating a PC information center on the Web called Yahoo Computing.

Yahoo is also getting into television, as a provider of technology information for local newscasts. But most of its budding media ventures are online. Last March, Yang launched Yahooligans, an online directory for children. In partnership with print outfits like Fodor's and the Village Voice, Yahoo is creating travel guides for U.S. cities. Before traveling from New York to San Francisco, say, you'll log on to Yahoo's San Francisco Website to find out what's happening in town and what people are saying about the hottest restaurants. The goal is to transform Yahoo's Website into what Web-heads call "a destination"--a site where a visitor will stay to browse a number of pages, rather than just one. Keeping customers longer helps sell ads, and so does going local--Yahoo is betting that restaurants and shops will want to advertise on its city-based sites. The company is also designing custom sites in Japan, Germany, and Britain.

infoseekSo far, the ambitious effort has neither produced profits nor revitalized the share price. Nor has it fundamentally altered the perception of Yahoo. "Most of our users today approach Yahoo and type in a keyword and go from there," says Yang. "They do not stop at our other sites." Still, compared with the other search sites, Yahoo is sitting pretty: The company has respected senior managers, a cohesive branding strategy that it has been pushing for months, and perhaps most significant, over $100 million in the bank. Says Jupiter's Patrick Keane: "Yahoo is leaps and bounds ahead. It's almost ludicrous to mention them in the same breath as the others."

The only competitive race is for second place. It is a dogfight among Infoseek, Lycos, and Excite. Ironically, in their race to differentiate themselves, the three are becoming more and more alike. Like Yahoo, each has a media strategy. In addition to search capability, each company now includes on its site ordinary content like news, weather forecasts, sports scores, and stock quotes. Each offers a personalized news service, so that when you visit, you automatically get information related to subjects you care about.

Each wants to stake out a market niche. Infoseek's CEO and president Robin Johnson is trying to pull away from the pack by positioning Infoseek as the business person's oracle. "If you're in business and you're busy, this is the search site for you," he says, adding that the company has developed software to help users refine their searches so they find what they want more often. To get the message across, Johnson and his team have spent more than $5 million on a print and radio advertising campaign. It's too early to determine if the ads are hitting their mark, but analysts applaud Johnson's focus on the business niche.

As a brand, Lycos trails the pack. The name doesn't help--it sounds like that of a pharmaceuticals company. But the Marlboro, Massachusetts, firm is undergoing an identity-lift. The company redesigned its site--it now looks a lot like America Online--and hired a new vice president of marketing with a track record in consumer branding strategies to help Lycos boost its visibility among netizens. In addition, Lycos has inked deals with companies like AT&T, Compuserve, Prodigy, Bertelsmann, and Sprint to license its Web index. According to Lycos president Bob Davis, these deals not only bring in additional revenue--$4.5 million--they also turn Lycos into a gateway to the Internet.

Of all the companies, Excite seems to be in the most precarious position. The company is burning through cash, having spent $30 million this year on high-profile acquisitions, partnerships, and advertising. This summer Excite acquired McKinley, creator of Magellan, a highly detailed Web catalogue, for $5 million in stock and $10 million in assumed debt. Excite then ponied up an additional $10 million to Netscape to keep both Magellan and Excite active behind the Net Search button. And Excite's multimillion-dollar advertising effort is the splashiest television campaign going, built around Jimi Hendrix's 1967 rock classic, "Are You Experienced?"

The effort is as risky as it is attention-getting. Excite still has money to spend--$30 million, to be exact--but its success depends on wooing customers from Yahoo. "I look at Excite, and I don't get excited," says Broadview's O'Leary. "They have tried to be in the content-creation business, the content-acquisition business, and the search business. Now they are trying to be cool, but we already have Yahoo."

That's the nub of the problem--in a superheated market, investors have put faith and dollars into four companies offering essentially the same product. The capital from those IPOs gives the search companies time to morph into something new, and they might, somehow, succeed. But no matter how they scramble, they can't overcome two facts: Their product is, increasingly, a commodity, and Internet ad dollars are scarce. Search is proving an elusive business; with Yahoo so far in the lead, a second-place brand may be no brand at all.

REPORTER ASSOCIATE Henry Goldblatt

Source: http://features.blogs.fortune.cnn.com/2013/05/26/yahoo-fortune-classic-1996/

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