Originally created 02/28/05

Yahoo's legacy: Profits possible on Internet



SUNNYVALE, Calif. - Co-founders Jerry Yang and David Filo parlayed Yahoo Inc. from a college hobby into a full-time job 10 years ago, but the Internet icon was never quite comfortable with the happy-go-lucky mood of the dot-com boom.

It's not that Yang and Filo don't like to have fun. After all, they gave their company a name often associated with rubes and adopted a joyful yodel as their calling card.

"We were certainly not sophisticated or civilized," Yang joked during an interview with The Associated Press ahead of the March 2 anniversary of Yahoo's inception.

What separated Yahoo's creators from the rest of the dot-com crowd was their desire to create a profitable business as quickly as possible - a contrarian concept back in those days of economic delirium.

The philosophy enabled Yahoo to begin making money in less than 10 months, and also fueled the Sunnyvale-based company's resounding comeback from the dot-com bust that obliterated hundreds of other Internet businesses.

"We have always built the company around profitability," Yang said. "When we're not profitable, it's terrible."

The partners discovered early on that being frugal isn't necessarily boring. One reason Yahoo's offices have always been painted in vibrant purple-and-yellow is because they were the cheapest colors available.

"They have always been more interested in pouring money into developing new products than spending frivolously on decorations and office supplies," said Erin Moore, a Yahoo product manager who joined the company in April 1996 when there were just 50 employees.

Yang, 36, and Filo, 38, became billionaires long ago, but they have stuck around as the "Chief Yahoos" at the Sunnyvale-based company because they are eager to continue innovating and increasing profits.

"It's immensely more challenging to get to $10 billion in revenue than it was to get to $10 million in revenue," Filo said. "That's why we are still here today. The problems have gotten harder, the challenges have gotten bigger and it's gotten more exciting."

Yahoo has grown from a handful of employees to more than 7,600 workers today, but Moore said the company's "work hard, play hard" culture has remained intact.

In between the long hours required to run the world's most popular Web destination, Yahoo's employees unwind by playing basketball, volleyball, bocce ball and even dodgeball at the corporate campus.

There's a similar ethic going on a few miles to the north at Google Inc., a fierce rival that Yang and Filo helped inspire. Yahoo doesn't pamper its workers as extravagantly as Google, which feeds its employees breakfast, lunch and dinner and even arranges to have their oil changed for free.

No one eats for free at Yahoo, although the company subsidizes the cafeteria prices. Yahoo is also inviting all registered users in the United States to download a coupon for a free scoop of ice cream on March 2 from Baskin-Robbins in celebration of its 10th anniversary.

Yahoo's profit-conscious approach has paid off handsomely, particularly for its founders. Filo still owns 6.4 percent of Yahoo's stock - a stake worth $2.8 billion. Having sold more of his holdings through the years, Yang owns a 4.8 percent stake worth $2.1 billion.

Yahoo already has amassed an audience of 345 million, including 165 million registered users who rely on the company's Web sites for e-mail, e-commerce, news, entertainment, driving directions, matchmaking, weather forecasts, job leads and search results.

The company believes it can become an even more vital information and entertainment hub as wireless and broadband technology changes how people interact with media, but Yahoo's leadership on the Internet isn't necessarily secure. Google, which got $10 million in early financing from Yahoo, looms as a formidable threat, and Microsoft Corp.'s MSN and Time Warner Inc.'s AOL have also ramped up their Web portals.

Yang and Filo are used to skeptics - they've been shadowed by doubters ever since they began compiling a list of their favorite Web sites while procrastinating on their electrical engineering graduate work at Stanford University.

"People gave us no chance of success 10 years ago," Filo said. "We have a lot of competition as always, but now we have got ourselves in a leadership position where our future success is really up to us."

Yahoo wasn't the Internet's first commercial success - that honor went to Web browser pioneer Netscape Communications Inc., which became a division of AOL after being crushed by Microsoft. But Yahoo remains among the small handful of still-influential survivors from the dot-com mania's early days.

"Yahoo really defined an era," said technology industry analyst Rob Enderle, who has followed Yahoo since it started. "They are the ones who set the tone for the Internet."

And Yahoo still defines the Net experience for latest generation of Web surfers, people like Jeremy Alicandri, 22, who have grown up with Yahoo.

While he was still in high school, he used $800 of his savings to start an online store, simplycheap.com, through Yahoo's e-commerce channel. The site now has eight employees and $2.4 million in annual sales, Alicandri said.

"Yahoo is the Internet to me. I do almost everything through them," he said.

Neither Yang nor Filo thought they would have such a big impact when they raised their first $1 million to fund the startup and hired technology industry veteran Tim Koogle as chief executive. Yahoo's initial public offering of stock in April 1996 helped fuel the gold rush psychology that spawned dozens of Internet startups flush with venture capital.

Much of that money was spent advertising on Yahoo's Web site, pushing the company's annual sales above $1 billion and its market value beyond $120 billion.

"We felt things were probably a little too good," Yang said. "You could see things were a little too frothy."

Then came the crash. One-third of Yahoo's revenue evaporated in a single year, saddling the company with a succession of quarterly losses. Its market value shrank to $4.6 billion at one point.

Determined to stop the bleeding, Yang and Filo recruited entertainment industry veteran Terry Semel to replace Koogle in May 2001. The shakeup included hundreds of layoffs, amplifying talk that Yahoo was being cleaned up for a desperation sale.

Semel is widely credited for engineering Yahoo's comeback by creating new subscription services to diversify Yahoo's revenue beyond advertising, and about $2.5 billion in acquisitions have added more firepower to the company's arsenal. The turnaround produced an $840 million profit on sales of $3.57 billion last year, lifting Yahoo's market value back to about $50 billion.

It wouldn't have happened, Semel said, without Yang and Filo.

"They are the pioneers, the guys who have made it possible for us to do the things that had never been done before," Semel said. "But it's not like they walk into work acting like this is the company that they started. They are always looking at what they can do as part of the team to make Yahoo more relevant in people's lives."

Milestones in Yahoo's history

February 1994 - While pursuing doctorates at Stanford University, Jerry Yang and David Filo begin to compile a list of their favorite Web sites. The list eventually appears online as "David and Jerry's Guide to the World Wide Web."

March 2, 1995 - Encouraged by the their directory's growing popularity and backed by $1 million in venture capital, Yang and Filo launch Yahoo - an acronym for "Yet Another Hierarchical Officious Oracle." The founders also like the name because the dictionary defines that word as unsophisticated.

December 1995 - Yahoo ends its first 10 months in business with a loss of $634,000 on revenue of $1.4 million but the company produces a $92,000 profit during the final three months of the year.

April 1996 - Yahoo goes public at a split-adjusted 54 cents per share. The initial public offering gives the company a market value of $334 million.

August 1998 - Stock splits for first time. Shares close at a split-adjusted $10.81.

February 1999 - Stock splits for second time. Shares close at split-adjusted $39.66.

May 1999 - Yahoo acquires Web site publishing tool maker GeoCities for $6.4 billion.

July 1999 - Yahoo acquires Broadcast.com for $8.1 billion.

January 2000 - Yahoo's shares close at an all-time of $118.75, adjusting for stock splits. The company's market value stands at $127 billion.

February 2000 - Yahoo splits stock for third time. Shares close at split-adjusted $82.88.

June 2000 - Yahoo licenses its search results from Google Inc., replacing a previous partnership with Inktomi Corp.

May 2001 - Yahoo replaces its original chief executive, technology veteran Tim Koogle, with former movie studio boss Terry Semel.

September 2001 - Yahoo's shares close at post-boom low of $4.05, shrinking the company's market value to $4.6 billion.

February 2002 - Yahoo acquires online help wanted service HotJobs for $439 million.

March 2003 - Yahoo acquires search engine provider Inktomi Corp. for $279.5 million.

October 2003 - Yahoo acquires search engine advertising pioneer Overture Services for $1.7 billion.

February 2004 - Yahoo unveils its own search engine technology, ending its partnership with Google.

May 2004 - Yahoo splits its stock for a fourth time. Shares close at a split-adjusted $27.08.

March 2005 - Yahoo employs more than 7,600 employees, its Web sites have 345 million users and its market value hovers around $50 billion.