Yahoo vs. Google: Why Panama is the wrong destination

The key to Yahoo's future is not to out-Google Google with a Google-like Panama advertising system.

Do the marketers rule at Yahoo, while the engineers rule at Google? Fred Vogelstein believes he has “empirical evidence” that such is the case.

Vogelstein begins his Wired magazine piece: “Terry Semel was pissed,” in bold for emphasis.

Vogelstein looks back to Yahoo vs. Google in 2002, and apparently has a pictorial record of Semel’s facial features at the time:

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!

Vogelstein concludes a lengthy discussion of “How Yahoo (Terry Semel) Blew It” by asserting that Yahoo is “paying the price” because Yahoo CEO Terry Semel doesn’t have “deep technical knowledge.”

Google was founded by engineers, two: Larry Page and Sergey Brin, Ph.D. Candidates at Stanford. Yahoo was also founded by two engineers, Ph.D. Candidates at Stanford as well: Jerry Yang and David Filo.

The corporate histories featured at the Websites of Yahoo and Google are strikingly similar.

The History of Yahoo, How it All Started

Yahoo! began as a student hobby and evolved into a global brand that has changed the way people communicate with each other, find and access information and purchase things. The two founders of Yahoo!, David Filo and Jerry Yang, Ph.D. candidates in Electrical Engineering at Stanford University, started their guide in a campus trailer in February 1994 as a way to keep track of their personal interests on the Internet. Before long they were spending more time on their home-brewed lists of favorite links than on their doctoral dissertations. Eventually, Jerry and David's lists became too long and unwieldy, and they broke them out into categories. When the categories became too full, they developed subcategories ... and the core concept behind Yahoo! was born.

The Web site started out as "Jerry and David's Guide to the World Wide Web" but eventually received a new moniker with the help of a dictionary. The name Yahoo! is an acronym for "Yet Another Hierarchical Officious Oracle," but Filo and Yang insist they selected the name because they liked the general definition of a yahoo: "rude, unsophisticated, uncouth." Yahoo! itself first resided on Yang's student workstation, "Akebono," while the software was lodged on Filo's computer, "Konishiki" - both named after legendary sumo wrestlers.

Jerry and David soon found they were not alone in wanting a single place to find useful Web sites. Before long, hundreds of people were accessing their guide from well beyond the Stanford trailer. Word spread from friends to what quickly became a significant, loyal audience throughout the closely-knit Internet community.

Back before Google? Aye, there's the Rub

According to Google lore, company founders Larry Page and Sergey Brin were not terribly fond of each other when they first met as Stanford University graduate students in computer science in 1995. Larry was a 24-year-old University of Michigan alumnus on a weekend visit; Sergey, 23, was among a group of students assigned to show him around. They argued about every topic they discussed. Their strong opinions and divergent viewpoints would eventually find common ground in a unique approach to solving one of computing's biggest challenges: retrieving relevant information from a massive set of data.

By January of 1996, Larry and Sergey had begun collaboration on a search engine called BackRub, named for its unique ability to analyze the "back links" pointing to a given website. Larry, who had always enjoyed tinkering with machinery and had gained some notoriety for building a working printer out of Lego™ bricks, took on the task of creating a new kind of server environment that used low-end PCs instead of big expensive machines. Afflicted by the perennial shortage of cash common to graduate students everywhere, the pair took to haunting the department's loading docks in hopes of tracking down newly arrived computers that they could borrow for their network.

A year later, their unique approach to link analysis was earning BackRub a growing reputation among those who had seen it. Buzz about the new search technology began to build as word spread around campus.

WHAT ABOUT NOW?

In 2004, Google took a license to U.S. Patent No. 6,269,361 and several related patents, held by Yahoo's wholly-owned subsidiary, Overture, in exchange for Yahoo’s dismissal of its patent lawsuit against Google.

Terry Semel leads Yahoo and Eric Schmidt leads Google.

The Google CEO is an engineer, a Ph.D. in computer science from the University of California-Berkeley, with a high-profile technology management resume. The Yahoo CEO is a humanist, an honorary doctor of humane letters degree from Emerson, with a high-profile media and entertainment management resume.

Is Yahoo a media company, but Google a technology company?

Google’s $150 billion market cap is fueled solely from advertising on the Web, Yahoo’s $38 billion market cap is also fueled from advertising on the Web.

Google CEO Eric Schmidt touts advertising potential to Wall Street, not technology, as does Yahoo CEO Terry Semel.

Vogelstein, himself, touts Google advertising know-how, not its search technology:

Google determined ad prominence on a Web page not just by the price advertisers were willing to pay per click -- as Overture had done -- but also based on how many clickthroughs that ad generated….By the time Google published its financial statements for the first time in 2004, everyone knew that the company had harnessed one of the great innovations of the Internet age.

The great innovation of the Internet age that Vogelstein lauds, however, is not sustainable.

In “Google multi-billion dollar risks in 2007” I put forth that Google’s core search advertising business model faces monetization risks and conclude:

Search advertiser empowerment puts Google’s search advertising gold mine at risk; Advertisers will not knowingly enrich Google shareholders at the expense of their own.

In “Scoring Google on quality” I dissect how Google search advertising is a costly Pandora’s box for advertisers that continuously increases in complexity, opaqueness and Google centricity:

In “The Google riddle: ‘organized’, ‘useful’ but impossible to comprehend” I discuss how AdWords customers are left in the Google black box dark.

In "Google AdWords: soon over priced with poor ROI" I explain why the Google “money-printing machine called AdWords” will soon malfunction:

Google’s unprecedented gross margins and a seemingly unstoppable bid price inflation are derived from the Google-centric auction system which is economically dependent upon price inelasticity of demand.

To date, Google AdWords customers have in fact been overwhelmingly insensitive to rising bid prices. I have pointed out to Schmidt that such a scenario is unlikely to continue indefinitely.

In “Travelocity to Google: Stop dissing multi-million dollar ad clients!” I cite Jeff Glueck, Travelocity Chief Marketing Officer, in his public call for greater accountability and returns from search advertising, in particular Google AdWords and AdSense:

Glueck laments that Google has become a “toll keeper” on brand names. Glueck underscored that despite its glory, search is not the dominant method for Web sites to gain traffic, or sales.

Seventy-five percent of visits are non-search referrals: direct URL entry, email links, banner ads…Eighty-six percent of sales dollars come from people typing in URLs for direct navigation, he said

Glueck stressed that while search engines deliver reach, they are not always the most efficient source of transaction acquisition. He said that Google and other search engines push advertisers to continually spend more on paid search by touting “self-funding” and portfolio theories.

Glueck likened such self-centered strategies by the portals to gambling casinos enticing people to “leave your profits at the casino.” Glueck told his fellow advertisers that if they succumb to Google’s self-motivated sales pitches they may end up destroying shareholder value and end up risking their own year-end company bonuses!

WHY PANAMA IS THE WRONG DESTINATION FOR YAHOO

In “Yahoo vs. Google: Should Yahoo surrender?” I underscore that Google is vulnerable in its three areas of endeavor: Search, Search Advertising and Diversification.

The key to Yahoo’s future is not to try and out-Google Google with a Google-like Panama advertising system. Yahoo is faltering in execution, it needs its own proprietary innovation breakthrough.

TAKE THE POLL: SHOULD YAHOO SURRENDER TO GOOGLE?

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