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Yahoo Taps Its Inner Startup

The yet-to-be-announced Brickhouse is designed to help the Internet giant keep up with cutting-edge startups and archrival Google

In Silicon Valley, being the big guy on campus isn't always a bonus. Yahoo! has learned this the hard way. For the past few years, the 13,000-employee company has found itself struggling against small startups to build the best next-generation Web features, tools, and social platforms. In a few key cases, including software for sharing photos online, Yahoo developed its own product only to eventually spend tens of millions of dollars to acquire tiny competitors who had done a better job of attracting the young, the hip, and the digital.

Now Yahoo (YHOO) is trying to tap into its inner startup. On Feb. 7, the company released Pipes, a service that allows Yahoo users to combine—or, to the technorati, "mash up"—data from various Web sites (think, for example, of combining news feeds from Google and Yahoo News). It received so much traffic in the first few hours that it was taken down later on Feb. 8. "It's a huge swing-for-the-fences idea," says Bradley Horowitz, vice-president of Yahoo's advanced development division.

Even more ambitious, however, is the Yahoo initiative that gave birth to the idea. Pipes is the first product to come out of Brickhouse, a new division of Yahoo that is scheduled to launch officially around the beginning of March. In many ways, Brickhouse is Yahoo's answer to the tiny, nimble shops that have nipped at its heels and chewed away at its revenues in recent years. Its purpose is to develop the kinds of innovative products that have recently stemmed from startups like social-networking site MySpace, now owned by News Corp. (NWS), and the video site YouTube, recently acquired by Google (GOOG).

VC-Worthy Ideas

Brickhouse marks a dramatic break from the old ways of doing things at Yahoo. It's designed to feel completely different from its established—and yes, older—online parent. The 14,000-square-foot offices are located in the hip South of Market neighborhood in San Francisco, 40 miles away from Yahoo headquarters in strip-mall-laden Sunnyvale. The facility is bereft of Yahoo logos. Purple, the company's signature color, is noticeably absent.

The staff is made up of Yahoo employees with the kind of ideas that, in theory at least, would have the venture capitalists of Sand Hill Road whipping out their checkbooks. Teams are built around ideas. And the whole effort is led by a genuine star of the Web 2.0 movement, Caterina Fake, who co-founded the innovative photo-sharing site Flickr, which Yahoo acquired in March, 2005 (see, 3/21/05, "Why Jerry Yang Likes Flickr").

The idea is that Brickhouse will give Yahoo a way to push the envelope and develop brand-new projects, while employees have the chance to experiment with ideas far from their day-to-day jobs. Horowitz is well aware of the risks. "The Valley is littered with examples of how this doesn't work," he says. But he compares what he and Fake are doing to what record label executives do, searching out the best talent. "Caterina and I think of ourselves as A&R people, signing up bands," he says.

Putting Innovation into Production

Clearly, Yahoo would like to reclaim the reputation for Web innovation that Google has usurped in recent years. The search giant, known for giving employees one day a week to work on their own projects, has seen its stock soar from $85 at its initial public offering in August, 2004, to $471 on Feb. 8. Shares in Yahoo, meanwhile, are roughly flat over the same period. Google's market cap has gone from $23 billion at the IPO to $144 billion, leaving Yahoo far behind at $41 billion.

Horowitz says that the idea for Brickhouse has been kicking around Yahoo for years. He credits Fake with making it a reality now. "This idea has always been floating around Yahoo, but nobody really grabbed the ball," he says. "Caterina really breathed new life into this."

Brickhouse was born out of the notion that Yahoo's employees come up with ideas for new ventures, but they haven't had an effective way to execute them. Horowitz points to a recent experience stemming from Yahoo's Hack Day, a two-day event held the last weekend of September, 2006, during which all Yahoo employees were given the ability to hack into the company's programs to develop new features and applications. One employee designed a tool that would leave behind users' fingerprints, in the form of their image or profile, when they visited a page. Yahoo executives realized the program could be useful to publishers and warrant development. However, the employee had another assignment and there wasn't a good way, at the time, to allow him to easily leave his current project to work on the idea.

Thinking Outside the Brand

In January, Yahoo purchased a company named MyBlogLog for an undisclosed amount. The acquisition does basically the same thing except it has extra features such as privacy functions that allow users to turn off tracking. If Brickhouse had existed last year, Yahoo potentially could have developed such capabilities on its own. "It is generally cheaper to incubate these things than to buy them," says Horowitz (see, 10/02/06, "Yahoo's Strategy: Growth by Acquisition").

Yahoo's brand is another challenge. People associate the company and its trademark yodel with one of the Web's prime destinations for mail, news, entertainment, and search. But Yahoo's status as an established, family-oriented, commercial brand can turn away some cutting-edge users. "Anyone with adolescent children will know how difficult they are to bring into a family atmosphere," says Graham Hales, chief communications officer for Interbrand, a global brand consultancy.

That's why Horowitz says that, with Brickhouse, Yahoo is going to launch many more products off-brand than it has done in the past. That he says will let the company float new, edgier ideas without having an adverse impact on the Yahoo brand, and it may attract users who have negative associations with Yahoo's brand. "It gives us another identity where we can be more playful," he says. "Not your father's Internet." Yahoo has let acquired companies, such as Flickr, continue to operate under their own brand names, but now even its own initiatives may not be labeled Yahoo, or at least not prominently.

Outlet for Creative Employees

Yahoo knows the struggles of brand and identity all too well. When Yahoo began asking Flickr users to sign up for a Yahoo ID, some users started posts announcing plans to leave. "I am leaving flickr," wrote one user in a Feb. 3 post. "I have watched with dismay for many many months as the 'face' of flickr has slowly started to change in a direction I am not comfortable with."

Horowitz is realistic about the challenges ahead. He expects that, as with startups, many of the ideas to emerge from Brickhouse won't take off. Yahoo is treating the site as an outlet of sorts for entrepreneurial and creative employees. It wants them to have the ability, as they would if they started their own company, to give things their best shot and then, if they don't really work, walk away.

In this way, Horowitz and others hope Brickhouse serves to help retain employees who otherwise would go off on their own in search of funding. It's a difficult task in today's tech climate where top startups can sell for sums that make a six-figure salary appear paltry by comparison. YouTube co-founders Chad Hurley and Steve Chen received more than $300 million each in Google stock when their company was acquired in October.

Bonus Incentive

Yahoo also faces a challenge in keeping its top programmers and engineers from rivals with their own innovation incubators. Google, Yahoo's chief competitor in search and many other areas, has its Google Labs division, which works on products that, according to the site, "aren't quite ready for prime time." Google has garnered a reputation for innovation, in part because of its one-day-a-week-for-experimentation policy, although critics point out the company hasn't come up with any substantial money-making ventures beyond its search business (see, 7/10/06, "So Much Fanfare, So Few Hits").

Horowitz says that Brickhouse developers whose ideas succeed would receive additional financial compensation for their work. He said the figure would be somewhere between a pat on the back and an acquisition-size bonus. "The idea is they would enjoy some upside," he says.

Whether Brickhouse will succeed remains to be seen. But the scope of Yahoo's ambition is clear. Sometimes to think big, you have to act small.

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