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January 21, 2007

A Story About Google and Yahoo

Wired unfolded an interesting story this week. How Yahoo blew it tells us how Yahoo tried to buy Google, was turned down and tried to be better than Google in search and advertising.

As Semel and his top staff sat around the table in a corporate conference room named after a Ben & Jerry's ice cream flavor (Phish Food), $5 billion sounded unacceptably high. Google's revenue stood at a measly $240 million a year. Yahoo's was about $837 million. And yet, with Yahoo's stock price still hovering at a bubble-busted $7 a share, a $5 billion purchase price would essentially mean that Yahoo would have to spend its entire market value to swing the deal. It would be a merger of equals, not a purchase.

Terry Semel -- a legendary Hollywood dealmaker, a guy who didn't even use email -- had not come to Silicon Valley to meekly merge with the geeky boys of Google. He had come to turn Yahoo into the next great media giant. Which might explain why the face of the famously serene CEO was slowly turning the color of Yahoo's purple logo, exclamation point included. "Five billion dollars, 7 billion, 10 billion. I don't know what they're really worth -- and you don't either," he told his staff. "There's no fucking way we're going to do this!"

Semel could talk tough because he had a backup plan. Yahoo would go out and buy its own top-notch search engine and its own search-advertising technology, and it would beat Google in the emerging arena of little text ads that pop up next to search results. Semel's decision to opt for this plan B was a fateful one. It was a smart play -- but Yahoo fumbled, bungled, and mishandled its execution at every step. (More on that in a moment.) As a result, Google today controls nearly 70 percent of the search-related advertising market, an industry worth more than $15 billion a year and growing at roughly 50 percent a year.

And now Yahoo's CEO regrets they didn't buy Google. Yahoo's mistake was that it didn't understand the importance of search. When web pages started to grow exponentially, they said it's just a commodity and used third-party search engines (Altavista, Google). Why invest in a technology that just sends people away from your site? Now Yahoo has a good search engine, but most of its users don't use it because it's better (it's not), but because they use other Yahoo services and it's more convenient.

Homework:
1. What would've happened to Google if Yahoo had bought it?
2. What is the main difference between Google and Yahoo?

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