Tech - Yang & Portal of doom

Nobody would have been surprised if he had pulled out. Hours before Jerry Yang of Yahoo!, one of the world's largest internet companies, was due to appear on the stage at an industry conference in San Francisco on November 5, a big part of his firm's strategy disintegrated. But Yang gamely turned up at the Web 2.0 Summit nevertheless, and in his gentle and polite way tried to explain how it had all gone so wrong. This has been a 'pretty amazing year', he said with understatement. But he couldn't quite bring himself to admit that he had made a mistake in June 2007 by taking over as chief executive of the firm that he and his friend David Filo had founded in 1994, at which they had since held only the tongue-in-cheek titles of 'chief Yahoos'. Yet a mistake it clearly was, and it is time for Yang and Yahoo!'s shareholders to say so.

At the time Yang thought that he could, through sheer passion for his creation, revive the ailing company. He had been one of those who, during the dotcom depression, invited a Hollywood mogul, Terry Semel, to run Yahoo! and turn it into a media company. Both Semel and Yang, however, missed the significance of a new rival, Google, even though Messrs Yang and Filo had helped Google's two founders—all four had been graduate students at Stanford to get started only a few years earlier.

Whereas Yahoo! saw itself as a 'portal', or gateway to media content on the Web, Google gave Web surfers a simple search box as their starting point. Whereas Yahoo! still thought of advertising as the equivalent of neon signs flashing on a webpage, Google placed tiny text snippets in the margins of its search results, targeted precisely at the keywords of the search and charging advertisers only when people clicked. In time, Yahoo! understood that Google's way was the future and tried to catch up—first by hiring Google to supply search, then by firing Google and buying and building its own equivalent. But it was too late to catch up.

Yang, who by nature is a non-confrontational sort of person, loyally supported Semel until the very last moment, telling The Economist in May 2007 that he and the rest of the board were 'in lockstep' behind their leader. One month later Semel was out and, to some surprise, Yang took his place. But things then began to go even more wrong.

The man whose big and lovable smile had once greeted millions of newcomers to the internet with 'Jerry and David's Guide to the World Wide Web' soon found himself testifying before Congress, with a grieving Chinese mother sitting behind him, about exactly what information Yahoo! had shared that had led to the jailing of two dissidents in China. Back at the office, Yang had to deal with warring fiefs and bitter personal rivalries. Executives kept leaving, engineers were demoralised and innovative projects were put on hold.

Then, in February this year, Microsoft offered to buy Yahoo! for $33 a share. This could have put Yang out of his misery. Microsoft, which owns a portal similar to Yahoo!'s and a search engine even further behind Google's, wanted to combine forces to put up a better fight. Yang said no. Several big shareholders revolted, but Yang insisted that the price was too low. In the end, Microsoft gave up in frustration. "A lot of people have replayed that in their minds; I'm no exception," Yang said ruefully at the conference. With Yahoo!'s share price now at $12, he is eager to prove that he negotiated in good faith. At the right price, "we were willing to sell the company," he said at the conference, but "they walked away." He said that "I don't have an ego about remaining independent" and that "both sides are to blame." Perhaps.

But Yang never offered a clear alternative to Microsoft's proposal. He went back to his friends at Google, who obliged by offering an advertising alliance that might have given Yahoo! some extra cashflow to tide it over a restructuring. The drawback was that the deal would have had Google, already the dominant power in search advertising, placing its ads next to Yahoo!'s searches in America. Trustbusters were suspicious, even when Google offered to make concessions. That is why Google, thinking of its long-term antitrust strategy, abandoned the deal on November 5, shortly before Yang took to the stage. With a sad shrug, Yang admitted that he was 'disappointed'.

Now what? For years, there has been talk that Yahoo! and AOL, a portal owned by Time Warner, a media giant, should merge. They are similar, but it is hard to see how combining two long-in-the-tooth portals could somehow create an innovative Google killer. Both rely heavily on branded 'display' advertising, which is suffering far more in the recession than the more precise search-related ads that are Google's mainstay.

Yang does not deserve the blame for all of this year's woe. Bad things can happen to nice people. But he has never even given a convincing answer to the question of what Yahoo!'s strategy should be in an ideal world. To be a 'starting point' for half a billion Web surfers, Yang likes to say. But how is that different from the old 'portal' idea which stopped working long ago, or the search box that Google in effect controls? Yang told the conference audience that he wants Yahoo! to become a 'platform company', suggesting that outside developers should build applications to make Yahoo!'s services more useful. But Microsoft, Google, Facebook, Amazon, Salesforce.com and all other self-respecting technology firms nowadays want to become platforms, too. Why should Yahoo!, which has been less innovative, be the one to succeed? This argument is the one that pains Yang the most.

There is a "perception that we're following," he admitted, but "we do believe we're innovating." The audience of Web entrepreneurs, many of them once inspired by Yang's example, let the matter drop. It is a bit sad to tell this old Web hero to go. He must decide to doso himself.

© The Economist Newspaper Limited 2008