Yahoo! : Business on Internet Time Group 2: Aaron Duke Alejandro Reynoso Erin Moon Sophia Benevento February 21, 2012 Dr. Jay Lee GM 105 California State University, Sacramento Executive Summary Yahoo started out as a hobby between two Stanford students, Jerry Yang and David Filo, and turned from a simple website with categorized information to a powerful navigational tool for millions of users. It generated millions in revenue and helped shape the way the modern-day internet is used, both in terms of streaming information and streaming revenue.
The U. S. military first used the internet in the 1960s as a way of safeguarding against centralized information. Decades later, it was used as a tool to help researchers share informaiton. In the 1990s, HTML language was created to help read documents easier. Within a few years, browsers, portals, and internet service providers (ISPs), along with the low price and easy access to computers had connected the world and the internet was born.
As Yang and Filo created a way to monetize the traffic created by the popular Yahoo portal, the attractiveness of the Yahoo model helped propel the global reach of the internet, and brought about intense competition, new tools, new models of monetization, and the need for new strategy. When using Porters five forces model to analyze the portal industry’s attractiveness, it is clear that attractiveness is low. The bargaining power of suppliers is high, bargaining power of the buyers is low, threat of new entrants is high, start-up costs cause high barriers to entry, alternative edia allow the threat of substitutes to be high, and the potential for revenue has saturated the industry with competitors. This competitive environment rapidly changed since Yahoo was first created. There was virtually no competition and it was able to quickly secure large market segments. Using a strategy of simplicity, independence and strategic partnerships, Yahoo created a user-friendly point-of-entry for consumers to find information on the internet while making millions of dollars. Yahoo led the portal industry from 1994 to 1998, during which its market capitalization grew to $30 billion.
In 1999, the industry began to change further as mergers and acquisitions consolidated power. Media companies, ISPs, browser companies and content providers were merging and acquiring each other in a flurry of moves in order to retain competitive advantage. The strategy of independence that brought Yahoo success needed to be reevaluated. In an environment with such volatile and intense competition, what strategy should Yahoo implement? As leader of the internet portal industry, Yahoo’s position, both in terms of its external environment and internal resources and capabilities, should be exploited in order to bring about above-average returns.
Both the Industrial Organization (I/O) and Resource-Based models of above-average returns can be utilized. It shows Yahoo to be in a favorable position and the tools needed to effectively create new partnerships that will secure market share and long term profitability. Further, A SWOT analysis shows that Yahoo has strong brand image and opportunities for strategic partnerships, even though as first-mover in the industry, it lacked a long-term strategy and is threatened by intense competition.
The story of Yahoo shows that a company’s strategy must always be evaluated for effectiveness in terms of its current external environment and its internal resources and capabilities. While effective strategy early on may bring about a favorable position in the industry, competitive forces will cause a company to seek out new strategies, new partnerships and new models in order to remain competitive and profitable. Background Jerry Yang and David Filo created the portal Yahoo in April of 1994. It was originally used as a hobby to track web addresses sent to them by friends.
They were students at Stanford, but they gave up their education to focus on running Yahoo. Jerry’s Guide to the World Wide Web was created by Yang and Filo as a guide to navigate though the web. These web sites were sorted into a database and thousands of users began to use their service. Yahoo officially became a business on March 5, 1995. They hired Tim Koogle as CEO, as well as a staff of six people which eventually grew. Yahoo’s operations had three separate departments: property development, marketing and sales, and international.
Property development focused on production and engineering. Marketing and sales handled corporate marketing, business development, and sales. They also had customized Yahoo pages in 18 countries, which was run by their International departments. Yahoo was located in Silicon Valley, and they offered five main services (properties) to consumers such as navigation, community, personalization, e-commerce, and international. Navigation allowed consumers to find information. Community offered an address book, email, chat, and message boards for consumers.
Personalization allowed users to personalize their web pages and e-commerce offered shopping and other online sales. International properties were designed for those in different countries and had each country’s language and local content. By 1998, Yahoo had an estimated 100 million connected consumers, 167 million page views per day, and a market value of $30 billion. By 1998, they had an increased revenue for 1. 5 years. Industry Evolution The Internet was first used in the U. S. Military for defense in 1960.
In 1986, the National Science Foundation used it for transferring research files and exchanging electronic mail. In 1991, Hyper text markup language (HTML) was created by Tim Berners Lee. This language allowed documents to link to one another through a host computer, and people could view graphics, audio and text. In 1994, the first internet browser was created. This allowed people to view web documents easily. Navigation sites, called “portals,” soon followed. Portals had two types of consumers: non-paying users and paying companies that wanted to advertise.
Portal companies typically made revenue through advertising, and they often paid for information that would be exclusive to their site, such as news and sports. Click-thrus and referral fees made up a majority of their revenues from consumers, as well as targeted placements. During the 1990s, personal computers began to sell quickly for home use. Computers were sold with modems, software, a browser, and a way to access the internet. The two browsers that were commonly used were Netscape and MSN. Portals could be chosen by the consumer, but they often came included on the computers.
Consumers also chose portals based on habit, quality of information, and brand. Access to the internet was usually done through the phone company, and later high-speed broadband was offered through cable providers. Internet usage began to increase at a fast pace and soon there were millions of people using the internet daily in many countries around the world. Industry Attractiveness Using Porter’s five forces model, we conclude that the bargaining power of the content providers varied depending on the relevance of the information.
The bargaining power of suppliers of unique information, such as popular real-time news or sports, was high. Some of the portals paid companies a monthly rate up to $50,000 for information. However, that bargaining power of other suppliers of information such as specialized content, which was less crucial to the portal, is moderately high. This could range between $2,500 to $20,000 per month. Nevertheless, some of the smaller content providers would receive free placement in exchange for their information. Overall, the bargaining suppliers of the most important information is very high.
Technology and labor were also suppliers. The threat of new entrants to the industry is high. However, the capital requirements in order for a new entrant to compete is also very high. During the first few years after Yahoo was launched, many other entrants decided to enter the market. There would be even more entrants in the next few years. Yet, most of the companies that compete against Yahoo are not making money, they are actually losing money. There are many substitutes in the industry that users may prefer to use instead of a portal.
Portals considered themselves to be media companies and not just a search engine. Some of the substitutes of portals are television, newspapers, movies, magazines, and even other non-portal websites. In addition, the bargaining power of major paying customers, those who want to advertise on the portals, is very high. In spite of this, the bargaining power of small paying customers is moderate. The smallest orders of advertisement were $1000. But all of the deals where typically negotiated. Moreover, the competitive rivalry is very intense. The only two portals who were making money in 1998 are Yahoo and AOL.
However, AOL was not only a portal, it also provided internet access, which provided the majority of their income. Yahoo was the only portal that was not also an ISP and was still profitable. In summary, the overall attractiveness to enter the industry is very low. The industry is saturated with many different types of competitors, and the start up cost for a new entrant is extremely high. Performance and Strategy When Yahoo invented the first internet “portal,” it also created the internet portal industry There was virtually no competition and it was able to quickly secure large market segments.
It had the “blue ocean” at its feet as it created new demand in an uncontested market. Yahoo saw the value of creating a user-friendly Internet portal before anyone else. By moving quickly and efficiently, Yahoo was able to negotiate, and frequently dictate, pricing with partners which led to large amounts of revenue. Yahoo’s performance has been very effective, resulting in positive revenue gains leading to profitability in 1998. Yahoo chose a strategy based on forming strategic partnerships that simply added value to the company.
They decidedly chose not to merge with other companies in order to retain full control of operations. This way, Yahoo executives were able to take full advantage of both its position and revenue streams and reinvest into the company. This would create value-adding “properties” and services and thus stay ahead of the competition. The strategy that Yahoo implemented proved very successful. This strategy was one of simplicity and independence compared with their other competitors. They had a maintained a business plan that was developed in 1995 and a one-year operating plan that showed their financial goals and top priorities.
They did not have a detailed marketing plan. The employees worked in close quarters, although the structure of the firm was hierarchal. Employees worked in cubicles to save costs. Yahoo was the only portal, aside from AOL, to post profits in 1998. AOL’s profits were significantly larger than Yahoo’s due to the fact that they generated large amounts of revenue as an Internet service provider (ISP). By selling access to the internet, AOL gained revenue from both Internet use and access, while Yahoo generated revenue only from internet advertising.
In 1998, it seemed that Yahoo was trending toward losing market share to AOL because would have been wise to invest money into becoming an ISP, however as we have seen, the dominant ISPs have become companies like AT&T and MCI, companies that control the means of communication, namely the phone lines and satellites. Yahoo has kept their basic strategy. Yahoo possesses in-house expertise in engineering. All in all, their strategy has been very successful until 1999. Mergers & Acquisitions of Competitors There were many mergers and acquisitions in the portal industry during 1998 and January 1999.
Media sites such as Disney and NBC were partnering with portals such as Infoseek and Snap to gain a competitive advantage and market share. Internet service providers were also acquiring portals with the hopes of gaining more consumers and increasing their profits. For example, the service provider @Home acquired Yahoo’s main competitor Excite, while AOL acquired the very popular Netscape. The internet and portal industry was new for the public in the 1990s. Although there were billions of dollars being spent in e-commerce and by advertisers, the portal industry had only a few years of data to compare when creating a new strategy.
Many companies relied on analysts’ predictions for revenue, which may not have been accurate. The strategies ranged from ISP’s hosting portals, media company mergers with portals, and portals acquiring numerous smaller businesses. While some of the strategies seemed to make logical sense, the only two portals that created a profit in 1998 were Yahoo and AOL. The problem with many of these acquisitions and mergers was the amount of money that was being spent at the risk of their stakeholders, particularly their capital market stakeholders. For example, @Home paid $6. billion for Excite, but only a few years later, @Home filed for bankruptcy (Source). These internet service providers and portals had a first-mover advantage so they were able to gain a large market share. Increased competition brought about mergers and acquisitions which consolidated power within fewer companies, in hopes of gaining more of a competitive advantage and greater market share. A Strategy Change? Koogle and his team were aware of the intense competition in the external environment and considered it’s options. Though they were successful and profitable, they were unsure of the future.
Their strategy was basic and they had used one business plan, which never changed. They were an independent company, unlike some of their competitors. The management at Yahoo should continue observing the market and begin to create a new business and marketing plan. The portal industry is growing and becoming fiercely competitive, and with Yahoo’s main competitor Excite flaunting their slogan, “Still with the same old Yahoo? ” they should consider changing their strategy. Their high stock price has allowed them to hire some of the most skilled engineers. This, along with capital has allowed them the option to either “make” or “buy” companies.
Partnering with other businesses that have interest in their company such as AT&T, MCI, Time Warner, and News Corporation may be good options. They also have the capital to acquire Geocities, which is another internet portal. They can also negotiate exclusive distribution deals with personal computer makers such as Compaq, Gateway, HP, and IBM in order to secure market share and increase its customer base. Yahoo should adjust their strategy because as their competitors continue to partner with other firms, their customers will likely choose to advertise with these larger companies and they risks losing millions in profits.
The best option for Yahoo would be to approach News Corporation and negotiate a possible media partnership in the future. This will allow Yahoo to gain more consumers while leaving them with control of the company. It is not wise to sell because Yahoo has an estimated worth of $30 billion, and their rival Excite had just sold for less than $7 billion. (I/O) Model of Above-Average Returns Yahoo invented the internet portal industry. In 1994, the external environment of the industry was void of economies of scale and barriers to market entry.
There was no need for diversification or product differentiation, and there were no other firms to compete with. Yahoo had a simple strategy that capitalized on its first-mover advantage, its access to top engineering talent in Silicon Valley, and its vision that focused on creating a user-friendly entry point for the internet. This simple strategy was sufficient for above-average returns in the early days of the industry, but as the internet evolved and industry competition increased, Yahoo realized it needed to reevaluate their position in the industry in order to continue enjoying the same above-average returns. External Environment: Several mergers and acquisitions had consolidated ISPs, portals, media companies, and content providers. Yahoo had was the only portal not in talks with a major partner. • Attractive Industry: Yahoo is still the largest portal in the industry. This position makes the industry attractive, however the growing competition makes the position unsecure. • Strategy Formulation: Yahoo can no longer survive on its own. Its partnership with telecommunication giant AT&T is losing strength as AT&T looks to provide customers with web content, no longer needing the content provided by Yahoo.
Yahoo needs to partner with traditional media companies, secure more distribution deals with computer companies, improve technologies that would enhance the speed and usability of their search engine. • Assets and Skills: Yahoo has a reputation for independence and tough negotiations. Moving forward, executives will need to be able to build and maintain relationships with potential partners. Yahoo currently has access to the top engineering and management talent in Silicon Valley. Strategy Implementation: Meet with executives from telecommunication, traditional media, and personal computer companies with the goal of creating exclusive partnerships. This will boost brand recognition, increase customer base, increase market share and profitability. Building and maintaining these relationships will lead to future growth. Resource-Based Model of Above-Average Returns It was necessary for Yahoo to also evaluate their internal environment. Resources and capabilities were essential for the success of the company, as well as a competitive advantage, strategy formulation and implementation, and an attractive industry. Resources: Yahoo has the top engineering and management talent in Silicon Valley. It has a popular product with a loyal customer base. It has financial resources, a market capitalization valued at $30 billion. • Capabilities: Yahoo was able to secure the position of industry leader, secure distribution deals and valuable partnerships, and create an internet portal that customers widely valued over the competition. • Competitive Advantage: Internally, Yahoo’s resources and capabilities exceeds that of its competitors.
Superior talent, better vision of what a portal should offer, and effective execution all contributed to Yahoo’s early success. However it needs to combine its resources and capabilities through strategic partnerships in order to maintain its competitive advantage. • Attractive Industry: As the leader in the internet portal industry, Yahoo executives can exploit opportunities to merge or form partnerships with any number of major industry companies. • Strategy Formulation and Implementation: Yahoo’s early success is attributed to its executives utilizing its talent, industry position, partnerships and financial resources.
Management needs to direct these resources and capabilities toward strategic partnerships with traditional media and personal computer companies in order to create value-adding partnerships, boost brand recognition, increase customer base, and increase market share and profitability. Building and maintaining these relationships will lead to future growth. The use of both the I/O model and the Resource Based Model are crucial for Yahoo to analyze and use as they formulate their strategy for earning high profits. SWOT Analysis When analyzing Yahoo, it is clear that they have many strengths.
One of their main strengths is their strong brand image compared to their competition. Yahoo is currently the second biggest business in the industry both in the United States and globally after Google. Also, Yahoo was the first business to enter into this new industry, with it’s portals, commonly known as search engines now. In addition, Yahoo built many strategic partnerships. These strategic partnerships were negotiated by the business development staff at Yahoo. One example of a strong strategic partnership was teaming up wit AT&T in order to combine Yahoo! s services with access to the Internet. Yahoo also had a few weaknesses. Yahoo was lacking a long-term strategy, and their unwillingness to embrace the changes in the industry. They also did not offer Internet access like other portals such as AOL and MSN. The company had many opportunities. For instance, they had the opportunity to do strategic acquisitions or partnerships with other companies in order to ensure that their leadership will not be taken away by other companies that were involved in mergers and acquisitions. Additionally, Yahoo had the opportunity of the growing online advertising market.
Expenditures for online advertising grew from $0 in 1994 to $2 billion in 1998, and they were expected to keep growing exponentially. A third opportunity that Yahoo had is to keep expanding to more countries. Yahoo had international properties in 18 countries, but there are many other countries where Yahoo can keep expanding. The threats that Yahoo was facing were the very intense competition and government regulations. As the Internet industry evolved, regulations became more strict and the government becomes more involved. References Cnet. Feb-21-2011. http://news. cnet. com/2100-1033-273689. html