Yahoo Kisses It All Good-bye

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.