Yahoo Case Study

Yahoo: From Internet Darling to Fire Sale

WHEN SHE WAS appointed CEO of yahoo in 2012, Marissa Mayer had just one job: Turn the company around. Yahoo was once the go-to internet leader, a web portal with e-mail and finance, sports, social media, and video sharing services. Advertisers loved it. At the height of the dot-com bubble in the spring of 2000, Yahoo was valued at more than $125 billion. In 2017, Yahoo’s core internet business was sold to Verizon for a mere $4.5 billion. What had happened?

By the time Marissa Mayer got the CEO job, Yahoo’s market cap stood at $19 billion. The once-leading internet company had lost some 85 percent of its market value. Yahoo was in deep trouble as indicated by a high CEO turnover: Mayer was the seventh CEO in less than five years. By the time she sold Yahoo to Verizon five years later, Yahoo’s market cap stood at $53 billion. How did she almost triple the firm’s market cap? And what explains the difference between the over $50 billion market cap in 2017 and the sale price of less than $5 billion to Verizon? Let’s answer these questions one at a time. We begin by looking at Marissa Mayer’s background and how she attempted to turn Yahoo around.

Pre-Yahoo

Mayer grew up in Wausau, Wisconsin, but took her higher education and built her career in California’s Silicon Valley. She entered Stanford University in 1993, majoring in symbolic systems, a discipline that combines cognitive sciences, artificial intelligence, and human–computer interaction. Still at Stanford, Mayer earned a master’s degree in computer science. On graduation in 1999, she declined over a dozen job offers, ranging from prestigious consulting firms to top-tier universities. Instead she went to a garage that housed a handful of employees for a small startup just a few months old. It was called Google.

Google’s 20th hire and its first female engineer, Mayer became a star. With a superior skill set and strong work ethic, she rose quickly to the rank of vice president. She helped develop many of Google’s best known features: Gmail, images, news, and maps. In particular, she designed the functionality and uncluttered look and feel of Google’s iconic search site. Mayer is known for her attention to detail, her commitment of time, and her desire to provide the very best user experience possible, putting products before profits. She maintains that if you build the best products possible, profits will come. No doubt Mayer’s pedigree at Google appealed to the Yahoo board. She was deeply involved in everything that Google had done right. And she was ready.

At Yahoo

Mayer’s first acts at Yahoo revolved around mission, culture, and cash. She developed a new mission for Yahoo—to make the world’s daily habits more inspiring and entertaining—to help reinvigorate Yahoo’s employees and get its customers excited again. Mayer’s mission attempted to inspire Yahoo’s employees to resume leadership in online advertising. To retain existing talent and restore morale, she also had to sell her workers on the new mission. She did so by sharing this mantra with them via tweets and other means: People then products then traffic then revenue. Employees understood they were the start of the transformation. To put Yahoo’s new mission into action, she also worked to rejuvenate Yahoo’s bureaucratic culture and engaged in more open and frequent communication, with weekly FYI town-hall meetings where she and other executives provided updates and fielded questions. All employees were expected to attend and encouraged to participate in the Q&A. Questions were submitted online during the week, and the employees voted for which questions executives should address.

Mayer also took on Yahoo’s organizational culture. Yahoo had become overly bureaucratic and lost the zeal characteristic of high-tech startups. Many Yahoo employees worked from home. For those who worked in the office, weekends began Thursday afternoons, leaving empty parking garages at Yahoo’s campus in Sunnyvale, California. In response, Mayer withdrew the option to work remotely. All of Yahoo’s 12,000 employees would have to come to the office. Her rationale was that working in the same shared space encourages collaboration, teamwork, and the creative spark to foster innovation. She moved out of her corner office and instead worked in a cubicle among other Yahoo rank-and-file employees. To ease the transition into now being required to work on the Yahoo campus in Sunnyvale, California, Mayer ordered a renovation and upgrade to Yahoo’s cafeteria, making gourmet meals—breakfast, lunch, and dinner—available free for all Yahoos.

Mayer also implemented other less-than-popular changes. Where before Yahoos enjoyed a casual work culture, now they faced a stacked ranking system of employee performance. Managers had to grade their direct reports along a bell curve, with a fixed percentage as “underperforming.” Team leaders were now to rank their employees in defined groups: 10 percent in “greatly exceeds,” 25 percent in “exceeds,” 50 percent in “achieves,” 10 percent in “occasionally misses,” and 5 percent in “misses.” Unintended consequences ensued. High performers refused to work with one another in the same team. Managers cynically traded team members to fill their quotas. Political infighting increased.

To raise cash, Mayer sold part of Yahoo’s ownership stake in Alibaba, the Chinese ecommerce company, for more than $6 billion. She then spent about $2 billion acquiring more than three dozen tech ventures, including paying a bit over $1 billion for microblogging and social networking site Tumblr and $640 million for video ad company BrightRoll. The acquisitions filled gaps in product line and brought in new engineering talent (so-called “aqui-hires”).

To turn around Yahoo, Mayer identified four strategic growth areas for investing significant resources and attention: mobile advertising, video, native advertising, and social media.¹ Mayer came up with the catchy phrase for the four areas: MaVeNS (= mobile advertising, video, native advertising, and social media), which she enjoyed using during investor presentations and earnings calls.

Failed Turnaround at Yahoo

After five years on the job, it became apparent that Yahoo would no longer be able to compete against Google and Facebook in online advertising. Once a leader in online advertising in the Web 1.0 portal world, Yahoo had fallen to third place well before Mayer took charge. Yahoo once owned the user experience in the early days of the internet for desktop users. But much has changed. In the early days, the internet was somewhat cumbersome to use. Yahoo provided a web portal that solved this problem for millions of users worldwide. It was their first stop once they logged in. With successful Yahoo products like Yahoo Mail, Yahoo Finance, and Yahoo Sports, many users spent their entire time online at Yahoo. In the first decade of the internet, this made Yahoo extremely attractive for online advertisers.

By 2012, however, the internet had undergone a dramatic shift from the Web 1.0 on personal computers to a Web 2.0 on mobile devices. The mobile experience, and with it mobile advertising, had become the new frontier. The difficulty that Mayer encountered as the new Yahoo CEO was that Google and Facebook had moved much faster and more successfully into the mobile space and thus captured the lion share of advertising. Google had long been the undisputed leader in online search due to its superior page rank algorithm technology over Yahoo’s older and less effective keyword-based searches. Since 2009, Yahoo’s searches were powered by Microsoft’s Bing. In addition, newer social media platforms such as Facebook captured online users’ attention and activities. With these changes, Google and Facebook started to dominate digital advertising. By 2016, Google captured 43 percent of all ad dollars spent, and Facebook captured 15 percent. In online advertising, Yahoo only had 3 percent market share, which had been declining consistently over time.

To complicate matters for CEO Mayer, Yahoo experienced two major data hacks under her watch. In 2013, data for more than 1 billion accounts were stolen, the largest corporate hack on record. A year later, Yahoo disclosed a second hack, this time affecting some 500 million users. As a result, Yahoo required all of its users to reset their passwords; many did not return. In the end, Verizon acquired Yahoo’s core internet business for $4.5 billion. After the sale of Yahoo’s core business to Verizon, Yahoo’s shareholders continue to own the investments made earlier by Yahoo in the Chinese ecommerce company Alibaba as well as in Yahoo Japan, valued jointly at more than $40 billion. Verizon retained the name Yahoo for its web properties, while the “original Yahoo” renamed itself Altaba (a portmanteau of “Alternate” and “Alibaba”).

Why did Verizon acquire Yahoo’s core internet business? Verizon’s core business as a wireless service provider is maturing, and the company has ambitious plans to compete with Google and Facebook in online advertising. Verizon is adding the Yahoo acquisition to its prior purchase of the online media company AOL in 2015 for $4.4 billion. Verizon has more than 110 million wireless subscribers. It hopes to build a portfolio of internet properties by merging AOL and Yahoo to offer news, sports, and finance against which to sell better targeted digital advertising.

Verizon’s strategy of acquiring internet assets that had fallen on hard times and to combine them to create an online search and advertising business to compete with Google and Facebook did not work out either. In 2018, Verizon wrote off $4.5 billion of the close to $9 billion it spent on acquiring Yahoo and AOL (bought for $4.4 billion in 2015) as Verizon’s online search and advertising business faltered.

Although Marissa Mayer failed to turn Yahoo around, she did create shareholder value when compared to the dire situation Yahoo was in when she took the helm. Indeed, by the time Yahoo sold its core business to Verizon, the internet company’s market value had almost tripled. Mayer also did well for herself: She departed Yahoo with some $230 million in total compensation for the five years as CEO.

DISCUSSION QUESTIONS

1. In an attempt to turn around Yahoo, Marissa Mayer defined a new mission for the internet company. How do strategic leaders such as Mayer develop and implement a mission for their company to achieve strategic goals? Why is an inspiring mission important?
2. What were some of the major changes Mayer implemented to turn Yahoo around? How do you evaluate them? In hindsight, what should Mayer have done differently, if anything? Explain.
3. What grade would you give Mayer for her job performance as strategic leader? What were her strengths and her weaknesses? Explain.
4. Do you believe the $230 million in total compensation was justified for Mayer’s efforts? Why or why not? Explain.