Monetizing Search Capabilities, Lecture by Sue Decker / Yahoo! Inc. (2008)

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It seems to me that one of the things that you're probably all thinking about is going out and starting companies and creating really cool products and building businesses around that. And in fact that is how Yahoo! started with two of your very own, Jerry and David. And it worked really well but what I want to talk a little bit about is the power of actually focusing on the customer as the guiding light in everything you do. And that is, you know, customer fixation or customer centricity is something that's almost become trite, it's used so often. But it's really, really, really hard to do. And it's super hard to change if you don't start that way. And it has a lot of power in how successful your company is. And I think actually some of the problems Yahoo!'s had in the last few years are results of very much focusing on products, as opposed to customers and consumers. And we're trying to change that now.

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So just thinking about what is important about customers. That in our world we have three groups that we consider our constituents. Now, only one is a paying customer. That's the one in the middle. These are the advertisers who bring to you free internet services. But on the left are the users all over the world. We have 500 million people that come to Yahoo! every month. If we were a country, we would be the third largest country. Five hundred million is a lot of people. And publishers and developers. So what a publisher is, is Yahoo! is a publisher. I just want to get the language straight and then we'll go from there. But a publisher is any company that has inventory. Inventory are web pages. You guys generate them, consumers all over the world. But it's inventory that we can sell to advertisers. And hang on a second. So those are the three groups in what we call our ecosystem and I'll come back to that. But publishers, advertisers and users. Then of course developers are third party developers that might develop apps on the site. Very similar to what Facebook did recently where they opened up and attracted third party apps to innovate on top of their platforms. So this is our little ecosystem. And I guess going back to the beginning, Yahoo! focused on creating some really, really cool products. And everyone who worked at Yahoo! when we were small was very engaged in all parts of that process. They were very close to the customers. We tried to create something. David and Jerry started creating helping people find what they're looking for. Organizing the web at a time that the web was not organized. And at the time they were organizing porn site as you guys know at Stanford. But it went into something much larger than that when they left. So in the beginning it was very, very easy to do that. And we focused on developing the very best email service, best mail, finance, sports, news, groups. We got into search a little late. We outsourced early on to a number of providers. Ultimately Google - helped them build the brand. That was one of our biggest mistakes in hindsight. But as you look at the landscape there, we developed a lot of different products. And then as you get bigger and bigger and you're tracking audiences all over the world in order to organize and prioritize and make decisions. We set up sort of P&L's around each of these products. And that make a lot of sense but as you get larger it causes you to lose what's important to the user as a whole who's looking at integrated experience across many of them.

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So just thinking about what is important about customers. That in our world we have three groups that we consider our constituents. Now, only one is a paying customer. That's the one in the middle. These are the advertisers who bring to you free internet services. But on the left are the users all over the world. We have 500 million people that come to Yahoo! every month. If we were a country, we would be the third largest country. Five hundred million is a lot of people. And publishers and developers. So what a publisher is, is Yahoo! is a publisher. I just want to get the language straight and then we'll go from there. But a publisher is any company that has inventory. Inventory are web pages. You guys generate them, consumers all over the world. But it's inventory that we can sell to advertisers. And hang on a second. So those are the three groups in what we call our ecosystem and I'll come back to that. But publishers, advertisers and users. Then of course developers are third party developers that might develop apps on the site. Very similar to what Facebook did recently where they opened up and attracted third party apps to innovate on top of their platforms. So this is our little ecosystem. And I guess going back to the beginning, Yahoo! focused on creating some really, really cool products. And everyone who worked at Yahoo! when we were small was very engaged in all parts of that process. They were very close to the customers. We tried to create something. David and Jerry started creating helping people find what they're looking for. Organizing the web at a time that the web was not organized. And at the time they were organizing porn site as you guys know at Stanford. But it went into something much larger than that when they left. So in the beginning it was very, very easy to do that. And we focused on developing the very best email service, best mail, finance, sports, news, groups. We got into search a little late. We outsourced early on to a number of providers. Ultimately Google - helped them build the brand. That was one of our biggest mistakes in hindsight. But as you look at the landscape there, we developed a lot of different products. And then as you get bigger and bigger and you're tracking audiences all over the world in order to organize and prioritize and make decisions. We set up sort of P&L's around each of these products. And that make a lot of sense but as you get larger it causes you to lose what's important to the user as a whole who's looking at integrated experience across many of them.

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There were basically three phases of Yahoo! Phase I from like '95 to 2000 was get big fast. That's where we went from zero to about 300 million users. And it was all about - we were very de-centralized. We pushed down decision-making all over the globe in order to get our brand out there and attract users. This is the time when hundreds of companies are going public. Capital markets were on fire. Everyone understood that the commercialization of the internet was a really, really important thing. Didn't know which companies necessarily were going to make it, and so financed a lot of companies. From 2000 and 2006, I guess we got to 188 million in that first phase. We went from 188 to close to 500 million users. We became very, very strong in many of these what I'm calling user-product areas. We also started to monetize what we do through media sales and search marketing. So what that means is if you look at any page, I know you're all familiar with this, but just to set the table. There are pages that might have a text link ad that comes based on a search string that a user puts in. And then ads will be served back and they're noted as sponsored in certain cases and the rest of the algorithmically ranked results are served. But then pretty much everything else on the internet is monetized through what we call display ads, or video ads or even text link ads. But on inventory that's not search inventory. We had different groups of sales force focusing on display, video, text, anything non-search. We had a sales force focused on search. And we had all these products within the O and O - meaning owned and operated Yahoo! network - that could be monetized. Phase III is where we are now which is really flipping the model on its head and saying, "How do we organize around an audience independent of where they might want to go?" They might care about search, they might care about sports, they might care about weather. But how do we think about all of our audience products and optimize for the whole, not for any one individual? How do we think about organizing around advertisers and not make artificial distinctions about whether they're buying search or display ads. Because fundamentally what advertisers are trying to do is buy the marketing funnel. They're trying to at the top of the funnel create awareness for their brands. And as you move down the funnel toward creating a transaction, they can use different types of advertising but search can be used for branding and can also be used for direct marketing. And same with branding, it can be used in both places. So the last 18 months of Yahoo! is about re-booting the company around these three groups. And it's everything from strategy to organization to process. And one of the things we found is our scale. That's our strength. But the scale became a weakness because a lot of these things were not connected in ways that leveraged it. And it makes it really hard to change once you get to that size.

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These are some of the challenges that we faced. We're going to start with advertisers then I'm going to go to users and then developers and wrap it up. But one of the really important trends that has happened, I'll give you some slides that show examples of these in a minute, is what advertisers started to want is to reach whatever consumer most wanted to buy their product. And it might be on Yahoo!, but it might be on Facebook or it might be on AOL or it might be on Google or maybe anywhere. So the advertiser doesn't care whether they're buying a set of Yahoo! properties. They're caring about reaching a demographic of chief household officer of women or men in a certain age group. What happened was these ad networks started emerging. And they include Ad.com and other things like that where an advertiser can go to one-stop-shopping. And the ad network then places their ad on any different publisher as opposed to our sales force which was just going out and selling Yahoo!. If we had organized around customers, if we've been organizing around, someone thinking about what our advertisers are doing, what are users are doing, we would have seen this earlier. We have leveraged ourselves into the number two ad network. We actually feel like we're in a position to transform the industry now but we were late in that. Because we were thinking about selling display on Yahoo! or selling search on Yahoo! and we weren't thinking about the whole. It also made it very difficult to buy across search and display. And that's true for the industry today. Google's really strong in search. They have their own search sales force. They really have nothing in display. Microsoft is not so great in either. Just the facts. So Microsoft is behind us in display and is number three in search. But in every one of these cases you can't go to one sales force. If your client - if you're General Motors and you want to buy internet ads, you got to work through multiple sales forces at every single company. So it's channel conflict all over. It's really hard to do that. And we have integrated our sales force. I'll talk about it later. But we're the only company that has done that so far. It's very difficult to optimize across performance and brand. You know the question in the early part of the days of the internet was, "Should I spend money on the internet? Should I take money out of broadcast or newspapers and buy online?" And you could see the audiences building and building. There's a billion people every month right now that go to the internet in a world of six billion. Many of whom are kids or don't have access to computers. That's a huge, huge statement of the power of the internet. But it was very difficult for an advertiser to optimize across the two and get to the user as opposed to being stuck with various products that companies are creating. It's also difficult to measure effectiveness. Back in the day, there's - do I advertise in the internet? Now that is totally legitimate. Every major marketer, top 200 marketers are advertising on the internet. And in fact hundreds of thousands are advertising through search marketing. So the question now is, "How do I optimize? How do I know whether this one is a better place to advertise versus this one? How do I know about pricing?" Lots of different questions there. So it's difficult to measure effectiveness. And the process of making a single buy is incredibly painful. I'll get to that in a minute. But it literally takes weeks if an agency or an advertiser says they want to buy a certain 10 million users across a demo. They're going to find pieces of that on multiple different sites. And literally it's not done by computers. It's done by fax and phone calls. It takes weeks to place ads on the internet now, not in search but in display. There's a lot of challenges. I think we saw this earlier than any of the other major portal companies but a lot of the ad networks emerged before we started getting going on this.

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Here's another example that's both open and social. So our homepage, Yahoo!'s homepage, is the most valuable real estate on the web. This ad, this is a several hundred millions of revenue a year. People come to our homepage multiple times per day. If you compare it to any newspaper or any other analog, it's extraordinarily valuable. What we didn't do in the past is open it up to third parties. We used it as a way to send people in Yahoo! You have all the links here, navigation, we send them to things in Yahoo! And some of the things we do are the best in the world but we're not going to have a monopoly on the best ideas. So what we've created are these buzz badges and we distributed them to our newspaper consortiums. So as you're reading something really cool, you hit buzz and you rate it real time. And that gets accumulated. We just launched this a few weeks ago. And then it surfaces that content on our front page. So all the time our today module is surfacing the things from all over the web that you guys are seeing, experiencing, and pulsing that are very interesting. We have Salon.com. We got them to a million users in a day for the first time ever. We are literally melting websites, other publishers because the traffic is so incredible by using the power of our homepage. Why are we doing that? Because if this is more relevant, people are going to keep coming back. Like a cup of coffee everyday, multiple times to the homepage and we'll sell more ads. The theory, if you love something let it free, it will come back to you. It's the model of search. You go to search not because you think you're going to end there. It's the journey not the destination. We're trying to make a lot of the Yahoo! properties a part of the journey and helping people get to the right destination.

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Obviously the last two weeks have been very exciting at Yahoo! Can you give us sort of a little bit of backstory of the discussions and what's going on? Well I don't know that I could tell you anything that's not in the paper because our company leaks like a sieve. As does Microsoft and everyone else involved. You know it really just came down to price. I mean it was fundamental - we're a public company and our board ran a process. And we weren't planning to sell the company but Microsoft came knocking. It's not the first time. And, you know, they made it clear they wanted to buy the company. We felt, our board felt, that we are in the midst of this transformation. We actually published our three year plan which the board approved last December. Called for a relatively flat profit year this year and substantial growth in '09 and '10 because we're absorbing a lot of the development costs for some of the things I showed you today before the revenue ramps. And so Microsoft's timing is really good. It was right at a low point. We were $19 a share. We just put out our guidance for the year which we didn't have guidance before that. But analysts have to figure out how to value stocks so they had their own numbers. And they were higher than what we put out. And so there was kind of a moment there where we hadn't goten out to the streets to talk to them about what we are doing. And the stock was reflecting a lack of understanding in that. In fact if you look at the projections that people were carrying, they were straightly lining out our growth rate in '08 which was our lowest growth rate and revenue for many years and our lowest margin. And so, if you're firing a missile and you're going a little off target, it gets farther away as the farther you go out. And stocks are all valued based on the forward look not the past. But people are using the past as a guidance as a benchmark because they didn't have anything better. So our stock kind of got out of whack with what our board felt the real value was. And Microsoft has had, they've said this publicly. They've literally lost more in 10 years in money that we've made in 10 years. They've been trying very hard to invest in becoming a leading online company. And at the top of Microsoft, they said things even three or four years ago that how Google has proven that you can give away software for free and monetize it with advertising. So therefore they need to become the largest ad company in the world. And they just haven't been very successful because it's not about how much money can you throw at this. It's also not an industry necessarily that reverts to monopoly like what they're used to. So it's about market places. And advertisers want choice. And in the case of search, there weren't really that many alternative choices that were as good as Google. I think we've made a lot of progress there. So it was a moment in time. It was an opportunity. They will say they offered a big premium based on where we were trading in the past. But it definitely was not a premium to where our board thought the value was in the future. You know and this went on for a few months. And came down to the wire on Saturday basically. I was in Omaha at the Berkshire Hathaway annual meeting. And sitting next to Bill Gates who's also on the board of Berkshire. I got there and I reached over to whisper in his ear. I said, "Should I kiss you hello?" And I said, "Or will people think we're getting married?" And he stood up stiffly and shook my hand. The 30,000 people at Quest Stadium were watching us on the floor of the stadium. But later that day, Jerry and David had been authorized by our board to go up there and deliver the price that they thought as a public company, what is it worth. There's always a price. And there was a bid and an ask of about $4. I actually would have bet more even money or more that I thought Balmer would take it. We'd be having a different discussion this week but they made a choice that that was too much. And we went back to work on Monday. So that's really where it is. I've had a lot of questions, a lot of interviews. It could come back. I'm not sure what their options are. I think we have a lot of options but we have to perform. We have to deliver. Some of the things I've talked about today have to change the industry in the ways that I've started to articulate or we probably will be a division of another company at some point. But I like that kind of pressure, the performance pressure. I want to play the game. If we lose the game, fair and square, that's ok but we haven't had a chance to really do it. And we're just starting to launch it based on seeds we planted last year.

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After we got the Microsoft offer, it was incumbent upon our board to look at alternatives. So one alternative is stand alone and generate the plan that we had talked with them and shared with them. Talked with them about three months earlier. Another alternative might be to have someone else monetize our search. Another alternative, some of these are not mutually exclusive, might be to buy AOL. Another one might be to buy MySpace. So all these things have been talked about in the press. I'm not hopefully saying anything you haven't read. Not confirming or denying any of it but you know there's a process of alternatives that were looked at. As a part of those alternatives, we conducted a limited test with Google results. On 3% of our search queries for two weeks we used Google monetization to understand the gap. And we published the gap publicly that what we thought it was before the test. And we thought it was a 100% difference before the test. I mean before we launched Panama, which is our search platform. And we closed that by 30% last year. So it's roughly 70% left. And I would just say what I've said publicly is it confirmed roughly what we thought. And what does this mean? I don't know how close everybody follows this. But I think of - there's two forms of search. Search, there's the algorithmic results that you get back when the things you're really looking for when you use search. And there's the sponsored results that you get back which if you're searching something that's commercial that might be a highly relevant result. Every time you click on a commercial result, Google gets paid or we get paid if you do it on our site. So the amount of queries a company generates across both algorithmic and search is what I think of as the golden goose. That's your inventory. That's the asset value. The size of the eggs she lays is how well you monetized them. How much do you generate for every single query. Every time you type in a search string for a new car, how much are we getting from an advertiser from that versus Google. Yahoo! has very publicly said a few years ago that we did not monetized as well. That we are not getting as much revenue per query as Google. So there's a gap there and we did not have a scalable search platform. We bought it from Overture which was like a sales and marketing company. I've mentioned earlier we didn't integrate fast enough. We have great engineering talents but we didn't do that soon enough. So we were late with it. It's been out for more than a year. It's closed the gap by a third. The question upon our board and upon our management team is do we want to move quicker to close it, which is easy to do by using Google. Or do we want to continue to be a principal in search because it's a part of that broader advertising vision that I talked about earlier. And I would say we're very much aligned with that latter few. We actually think that because we are the only company with real scale in both display inventory and search inventory we can create the same RPM advantage that they've done in RPS. So if we were to do anything with them, it would recognize that longer term that's our objective. And we'd be balancing short term with long term. And beyond that we've made no decisions and you know we've been talking to them. As Eric Schmidt said on his conference call, "Yes, we've been working with those Yahoo! people. And they're very nice." So we tried to say it. I was waiting for the moment at our conference call to say, "Yes, those Google people are really nice." But the moment didn't come up, so...