Yahoo Kisses It All Good-bye

The secret of Yahoo's original success was that it committed itself to standing shoulder to shoulder with its customers. So what made the company turn its back on them?

About a year ago, one of the founding editors of Fast Company asked what I thought would become of Amazon.com. We were sitting in his office, drinking coffee and talking about the grim aftermath of the dotcom collapse. I said that I didn't know, but I guessed that Wal-Mart would be a likely acquirer, if it ever came to that. He shook his head in disbelief and said (and I'm paraphrasing here), "Is that what this has all been about? That eventually, we all become part of Wal-Mart?"

To my mind, becoming part of Wal-Mart isn't such a bad thing. I think it's a great company. But I understood what he meant. Millions of people thought that the new economy and the companies it created were about something larger than "Always Low Prices." They thought that the new technology enabled a peer-to-peer relationship between companies and customers. They thought that the Internet opened up a world of possibilities and combinations and gave customers an unprecedented opportunity to participate in that world. And they thought that values now mattered in the creation of value.

Yahoo was one company in particular that seemed emblematic of this new-economy mind-set. At its core, it simply repackaged commoditized content in ways that added value for its customers. But it did this exceedingly well, as anyone who has ever used Yahoo's financial-services sites will attest. And it did that to the nearly exact specifications of its customers. My Yahoo enabled people like me to gather the information they wanted in a coherent package that was constantly (robotically) updated. Throw in email capability and the Google search engine, and you had, hands down, the best Web site in the world.

The thing about the Web is that people think they own it. They do not think that it belongs to AOL or IBM or General Motors or the FCC or nonprofit organizations or any other enterprise or institution. They think it belongs to them. And the great strategic insight of Yahoo's founders was their understanding and acceptance of this belief. Yahoo, which was founded in 1994, just eight years ago, came to command a global audience because it aligned itself with its customers' needs and beliefs. You come, and we will help you build it. And come they did, 237 million of them, the greatest constituency ever gathered by a media company in such a short time.

After the stock fell through the floor in 2000, and then through the basement floor in early 2001, new management was brought in. Terry Semel, a former Warner Bros. executive, was installed as the chairman, chief executive officer, and director. The goal became revenue extraction. Yahoo turned into a math problem: We have 237 million customers, and we have to figure out a way to get $1,000 out of each one of them. That, in turn, will make us a $237 billion corporation and restore us to glory.

Once a company thinks of its customers as a revenue-extraction resource, the game changes. Yahoo changed. It began to celebrate all of the ingenious ways that it had found to gin up revenue. We'll charge for fantasy leagues! We'll charge for gaming! We'll charge for personalized email addresses! Hooray for us! We'll make them all pay! We'll be rich!

And there was nothing wrong with that. It's a free market. Customers didn't have to buy the bells and whistles. But, of course, that wasn't enough. The collapse of the online-advertising market wasn't some sort of momentary hiccup. The online-advertising market fell apart completely. Consequently, in every quarter of 2001, Yahoo posted a loss. The promised turnaround wasn't forthcoming. And just charging for stuff wouldn't get it done. Something else was needed.

So Yahoo decided to change its privacy policy, allowing it, as the Economist tartly put it, "to exploit users' personal information to market its own and business partners' products and services -- unless users take the trouble to opt out by ticking a long list of preferences." In other words, the greatest Internet company of its kind would become a direct-marketing and solicitation outfit, cold-calling families at dinnertime, spamming their email inboxes, and cluttering their mail with "targeted" appeals. In one fell swoop, Yahoo had done the impossible. On the one issue that most concerns Internet users -- privacy -- they had managed to allow Microsoft to occupy the moral high ground.

Changing the Yahoo privacy policy was an unusually stupid decision -- not just from the standpoint of brand management. It was a stupid business decision, since it aligned the company against its extraordinary customer base. Strategically, it entered Yahoo into a declining business category at the exact moment when it might well have created an entirely new advertising business category known as permission marketing.

Seth Godin, a former Yahoo executive and a Fast Company contributing editor, wrote the book on this subject. Permission Marketing (Simon & Schuster, 1999) was ahead of its time -- but exactly right for the future of Yahoo. The premise was straightforward: People do want to be advertised to. They just don't want to be advertised to unnecessarily. If you ask them for their permission and give them lists of categories that are acceptable to them, they will be open and responsive to your appeals.

When I worked in Boston in the 1990s, I can remember driving to work every morning and being bombarded with radio ads for Giant Glass (I can still remember the song: "Who do you call when your windshield's busted? Call Giant Glass"). Could there possibly be a less efficient marketing campaign? I probably listened to 2,500 Giant Glass ads in all that time. My windshield never cracked.

Because of its customer base, Yahoo had the opportunity to merge with, acquire, or be acquired by one of the Big Three advertising-and-marketing-services companies: Omnicom Group, the Interpublic Group of Companies, and the WPP Group. In so doing, the company had an opportunity to create a permission-marketing model that would have reaped substantial revenue from every one of its customers, while rationalizing the advertising market in a profound and important way.

Consider my family's time in Boston. We moved out of an apartment in Boston into a larger residence in nearby Dedham, Massachusetts. We completely renovated the Dedham house, and in so doing, we found ourselves in the market for all kinds of products, from mattresses to appliances to plumbing fixtures to garden tools. Had a Yahoo/Big Three Ad Services combination existed then, we could have asked for advertising in all of these product categories and made our decisions accordingly. That would have provided well-compensated work for the ad-services division, a commission for the Yahoo division, and a willing target audience for product companies. A win-win-win.

Now fast-forward to, say, 2005. Roughly 33% of the U.S. population has high-speed Internet access. Another 50% is connected at 56-K speed. Most companies are connected to one another through Web-services technology, which enables Wal-Mart computers to inform Yahoo computers of the latest price points on every single product sold in the store -- instantly. The Big Three Ad Services Giant has gone out and organized specialty stores into advertising co-ops. They now pay a fee for the same kind of Web-services technology that the big companies use. All they need now are people who want their stuff. And there sits Yahoo, every day, providing all of these vendors with the names and addresses of each and every one of its customers, with their permission to do just that.

Former Citigroup chairman and co-CEO John Reed thought he could build the biggest bank in the world by taking a penny on every transaction conducted with a Citibank credit or debit card. Similarly, Yahoo/Ad Services Giant could take 5 cents on every transaction and make money -- and it could make even more money by producing and distributing the advertising.

It would, of course, take time to build such an enterprise and to make it work. It might be 2006 before it would really begin to click. But look at the alternative. Imagine coming home from work at Yahoo and saying to your spouse, "We're no longer just the greatest Internet company; we're also email spammers and dinnertime-harassing phone callers and junk mailers." What would your spouse say? What Yahoo's most fervent admirers said was, "Please go away."

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York. Read his weekday musings (www.johnellis.blogspot.com) or find a catalog of his columns here.

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