It’s official: Yahoo is a media company. Microsoft is a technology company
When Tim Koogle ran Yahoo he was sure that Yahoo was a media company. He taught the company how to be a media company by creating Yahoo Directors and Yahoo Producers. He understood that his job was to capture an audience by entertaining them and make money by selling access to that audience to advertisers.
Terry Semel continued the same theme. Nearly all of Yahoo’s technology came in through acquisition: Yahoo Store is ViaWeb. Yahoo Mail was RocketMail. Yahoo search is a combination of Inktomi for the organic search results and Overture for the bidding and inventory management system.
And then Yahoo lost its way, forgetting that they were never, at their heart, a technology company, even though they were founded by two Stanford Engineers, Jerry Yang and Dave Filo. They rebuilt their search technology and developed several in house social networking projects.
Microsoft, on the other hand, has typically built their core technology from scratch, with some notable exceptions like SQL server (a Sybase port) and Internet Explorer (Spyglass). And Microsoft is not a media company. Microsoft got its start by selling software that they wrote directly to customers. You won’t find “Microsoft Producers” in the core Microsoft organization. Remember Ballmer screaming Developers, Developers, Developers? That is not a media company. Microsoft people are technology geeks at their core.
With the Microsoft/Yahoo deal announced today, Yahoo returns to its roots as a media company. Under the deal, Yahoo will use Microsoft Bing for search. They will essentially monetize their audience using Microsoft technology. Ad sales fall to Yahoo, which again makes sense because they are the media company, the company that understands the three pillars of any good media company: content, audience and advertisers.
And Microsoft can stop pretending to be a media company. They have been struggling to figure out how they can continue to exist as a software company when most software for the masses will be ad-supported and free. Do they have to learn how to sell to advertisers? Painful.
This is not the first time that Yahoo has been called upon to use their massive reach to build a technology king. Early on, Yahoo used Google’s search technology on their site. We saw how that worked out.
The challenge for Yahoo? With the costs of developing search technology off their plate and Microsoft offering a whopping 88% of the search revenue to Yahoo for five years, Yahoo will be a awash in cash. Now they need to figure out, without the burden of having to build the technology, how to entertain that audience. And Carol Bartz is not a likely choice to run a successful media company. If she is smart, she will find a successor quickly and step aside, taking the credit for changing Yahoo’s focus back to where it began.
The best proxy for running Yahoo is Disney. Build a diversified media company with a unique experience, including strong core values that run through all the properties. And buy the best technology and most creative people in the world to get it done. But rather than Disney, which monetizes mostly through premium fees, do it with advertisers.
