Yahoo!:  The Cost of Freedom

Bellevue University


This thesis proposal discusses how Yahoo! became and remains the industry in providing free Internet information services. It examines; the company’s history, basic management principles, brand recognition, basic financial information, company growth, and competition. Not included in the proposal are the company's organizational structure and SWOT analysis.

Yahoo!:  The Cost of Freedom

     Yahoo (the exclamation point has been dropped to keep it simple) was created as a free service to the Internet community. The original intent of Yahoo has not changed today. This proposal will take a historical glimpse at how Yahoo originated, boomed, busted, yet remained a leader in the industry. Next, it will show how the founders’ original intent remains the primary focus of Yahoo’s mission and values. It will then demonstrate how the mission of Yahoo built a global brand and image. Then it will address how Yahoo generates revenue to provide and grow its renowned cost free services. Finally, it will address three of its biggest competitors.          

Yahoo began as a student hobby and evolved into a global brand that has changed the way people communicate with each other and access, share and create information. 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. 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’.  In March 1995, the pair incorporated the business and met with dozens of Silicon Valley venture capitalists. They agreed to fund Yahoo! in April 1995 with an initial investment of nearly $2 million.  Yahoo! launched a highly-successful IPO [initial public offering] in April 1996 with a total of 49 employees. (History of Yahoo, n.d.)

The IPO valued Yahoo at $848 million (Pitta, 1996). Four years later Yahoo soared to a market value of $129 billion (Yahoo!, 2001 pp. 22, 36). A couple weeks later, the Internet bubble started to deflate and then popped. In 2002, Yahoo suffered its lowest price and the real possibility of following numerous other Internet companies into bankruptcy, when its stock price briefly touched, a split adjusted, $4 a share (Yahoo!, 2002 p. 22). This down turn effectively wiped out $122 billion from shareholders and shook investor confidence.

     Following the rocky road of market valuation, the mission and focus of Yahoo barely wavered. The thesis will look at the company’s mission statement, and show how the original intent has remained.

Our [Yahoo’s] mission is to be the most essential global Internet service for consumers and businesses. How we pursue that mission is influenced by a set of core values - the standards that guide interactions with fellow Yahoos, the principles that direct how we service our customers, the ideals that drive what we do and how we do it. Many of our values were put into practice by two guys in a trailer some time ago; others reflect ambitions as our company grows. All of them are what we strive to achieve every day. (What We Value, n.d.).

Further supporting this mission statement are Yahoo’s easily understandable core values: excellence, teamwork, innovation, community, customer fixation, and fun (What We Value, n.d.). Both the mission statement and core values support the fundamental idea Yahoo’s founders had in the beginning. Yang commented on David Filo’s vision to Fortune magazine: “David had it in his gut very early on that Yahoo could ultimately be a consumer interface to the Web…” (Schlender, 2000).

     Yahoo’s mission statement and values shows how management built it into a well-known brand and image. As Yang stated in an interview with Red Herring, “One of the reason’s Yahoo is successful today is it’s pretty human-it’s more of a social-engineering product than software” (Found You on Yahoo!, 1995). Unlike other companies at the time, Yahoo focused building an image and branding itself early. “Call 1998 Yahoo’s Year of Branding,” this was when Yahoo appeared everywhere (Angel, 2000 p. 108). The image built by the tagline, “Do you Yahoo?” created two things. First, it allowed people to attach emotion to the company. It built an image people could identify with; the social product Yang discussed earlier. Second, it created a market place for an extremely strong advertising model. 

     Utilizing the advertising model, the thesis will examine how users generated revenue needed to support the free services. In 1996, Yahoo “derived substantially all of its revenues…from the sale of advertisements and promotions on Yahoo! properties,” to the sum of $19 million (Yahoo!, 1997 pp. 6, 20). Today little has changed in revenue generation because for 2005 Yahoo’s marketing services revenue totaled $4.6 billion whereas subscriber, premium service, fees equated to only $664 million (Yahoo!, 2006 pp. 6,7). Although a lot of money, the cost of operating and development reached close to $887 million for 2005, approximately 33% of gross revenue after removing the cost of sales and marketing and before acquisition costs (Yahoo!, 2006 pp. 6-9).

     The 2,600% increase in revenue over 9 years attested to the number of emotionally attached customers and superior free products and services Yahoo offers. With Yahoo’s ability to generate positive cash flow, the thesis will examine the “build, buy, or rent” entrepreneurial philosophy of Yahoo’s investment banker, J.J. Healy (Angel, 2002, p. 93). Focusing specifically on the partnerships and strategic acquisitions of mail and messaging provider, Four11, and search provider, Inktomi.

     Finally, the thesis will examine competition and its effect on the future. The 2004 SEC Annual Report discussed how “companies such as Time Warner's AOL and Microsoft may have a competitive advantage because they have greater access to content, maintain billing relationships with more customers and have access to established distribution networks” (Yahoo!, 2005 p. 8). Both companies have been slowly increasing market share and services, therefore, cutting into the bottom line. Finally, it will address the stiff competition it faces by search provider Google.

     In conclusion, the management’s principles and intent of Yahoo have remained. From a humble beginning, the company touched the stratosphere and then met reality. It kept true to its core values and mission statement, and provided a brand and image customers trusted. It looked at how the emotional attachment allowed Yahoo to generate the revenue need to further expand its free Internet information services and remain at the top of the industry. Finally, it will shed some light on how competition affects revenue and its effects the “cost of freedom”.


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