On July 17, the top dogs at Warner Bros. Online gathered around a giant TV screen in their offices high above the streets of Los Angeles. But instead of watching Bugs Bunny, Daffy Duck, or some other famous Warner cartoon, they found themselves transfixed by an internal slide presentation of a giant yellow Pac Man. His name: Yahoo! His target: nearly everything.
The mesmerized executives watched as Yahoo ate his way through the best that the Internet has to offer. First, he gobbled up the rights to news from such titans as CNN and Reuters Holdings PLC. Then he moved on to electronic commerce, downing deals with retailers such as bookseller Amazon.com Inc. and music outfit CDnow Inc. The voracious little creature went on to munch his way through Internet staples E-mail and chat rooms before finally coming to a stop just before entertainment. "Yahoo just gets bigger and fatter and gets more and more revenue," said James Moloshok, senior vice-president at Warner Bros. Online. But no more, he told his troops: Warner would fight back.
How did little upstart Yahoo! Inc. make it onto the radar screen of Warner Bros., a division of media goliath Time Warner Inc.? In just three years, Yahoo has morphed from an ordinary search service into the be-all, do-all of the Net, offering a dizzying array of services and information. Need a daily fix of news, stock quotes, weather, and E-mail? Head to Yahoo. Want to house-hunt, figure out a retirement plan, or research the Ebola virus? Yep--Yahoo. It's even a Web hangout for those craving a little R&R of, say, online blackjack, shopping for premium handmade cigars, or Koi pond supplies.
HEAVENWARD. Vast selection has catapulted Yahoo into the No.1 spot on the Web, with 40 million people who log on every month--more than the 30 million who tune in weekly to NBC's top-rated TV show, ER. And Yahoo's stock? It has soared heavenward, to 23 times its 1996 IPO price: The market capitalization was $9.1 billion on Aug. 25. That day the $97.50 stock price was 305 times projected 1998 earnings of 32 cents a share--astonishing, considering that Microsoft Corp., the computer industry pacesetter, is valued at 52 times earnings. Yahoo CEO Timothy Koogle is unfazed by the valuation: "I'd be hard-pressed to say it's overhyped. We've set out to make Yahoo the only place anyone needs to go to get connected to anything. There's nothing in the real world to compare to that."
Little wonder, then, that media companies such as Warner Bros. and Walt Disney Co. are in such a stew over what to do about the Silicon Valley company. At stake is not only how to get the attention of today's 90 million cybersurfers. It's a digital land rush, with companies madly scrambling to stake a claim as an information giant in the next century. Already, more people are hopscotching across Web sites than the number of viewers TV could claim after a dozen years in existence. And there are no signs the Web's growth is slowing: By 2002, some 328 million people around the globe will be using this far-flung information pipeline, according to International Data Corp.
What's emerging faster than many imagined is a Net generation that rises not to its newspapers and TV news shows but to its coffee and glowing computer screens. Some 64% of cybersurfers watch less TV now than they did before their Web-cruising days, while 48% are not reading as much, according to market researchers Strategis Group. Suddenly, the prospect of being a media goliath without grabbing the eyes, minds, and pocketbooks of the Internet droves seems dicey indeed. "With Yahoo, you can't measure things like price to sales," says Abel Garcia, senior vice-president at investment firm Waddell & Reed Inc., one of Yahoo's largest shareholders. "You have to look at it as the new media company of the 21st century."
And that could be a mouth-watering prospect. Unlike traditional media, this new Internet breed will dish up not only information and entertainment but also a way to act on it. Like New Age general stores, new media companies stock news, staples, and all the hottest gossip. Consumers, for example, can get the latest information on long-term mortgage rates--and find a real estate broker, view their dream home, and apply for a home loan, all under one roof. When a deal is struck, the new media company collects a fee.
GLITZED-UP GATES. This lucrative, one-stop Web site approach is the most coveted business on the Net today. And, oddly enough, it goes by the drab name of "portals." These are the glitzed up entrances to the Web that have so many goodies that their operators hope cybersurfers congregate en masse and then rarely venture elsewhere. And like all high-rent districts, they can charge a premium for advertising, while also cashing in on consumer E-commerce. Online shopping alone is expected to balloon to $37.5 billion by 2002, says Jupiter Communications.
This has not escaped the giants of the media world, who are piling into the business like so many giddy teenagers squeezing into a Volkswagen Bug. In July, NBC spent $6 million for a 19% position in Snap!, the struggling portal operated by CNET Inc. Disney quickly ponied up $70 million and traded its majority stake in Starwave Corp. for 43% of rival Infoseek Corp. And insiders say that Excite Inc. has held talks with several media giants, including Time Warner. "The pitter-patter of competitive footsteps has turned into a clip-clop," says Internet analyst Mary G. Meeker of Morgan Stanley Dean Witter.
Almost overnight, the competition has gone from stiff to downright scary. Existing portals such as Infoseek have been beefed up with cash from media companies, while TV networks have signaled that they have no intention of being outnetworked by a cyberspace upstart. Technology bigwigs Microsoft and Netscape Communications Corp. are joining the scramble, too, bringing the powerful draw of their browsers with them. From America Online Inc. to General Electric Co./NBC, these giants are poised for combat. Enemy No.1: Yahoo. "This is the first time since Yahoo started that it will be vulnerable," says Halsey M. Minor, CEO of rival CNET. "In the next nine months, things will be vastly different."
LIKE BILLBOARDS? The firepower of new and invigorated rivals is worry enough for Yahoo. But the company may be facing a more fundamental threat: convincing Corporate America that it can get a big bang for its buck by advertising online. A small but growing number of companies are beginning to question the value portals bring to their marketing efforts, which could take the air out of worldwide ad spending forecast by Forrester Research Inc. to hit $15 billion by 2003.
Charles Schwab & Co., for example, no longer pays millions to AOL to be featured on its finance channel because it says less than 5% of its customers used AOL to get to Schwab's Web site. "Customers were looking at positions on portals a little like billboards on the side of the road," says Martha Deevy, Schwab's senior vice-president for electronic brokerage. "Over time, they just become part of the landscape."
Could it be? Is highflier Yahoo a mouse-click away from becoming a has-been? Already, analysts are predicting that no more than a handful of the more than a dozen already-declared players will survive the portal melee. They warn that the added competition--along with the ever-mushrooming number of Web sites--could spread crucial advertising revenues too thin. This year, portals are expected to attract 15% of Web traffic and 67% of North American ad dollars, or $870 million. By 2003, though, they will grab 20% of traffic but only 30% of ad dollars, or $3.2 billion, according to Forrester. "It's a real threat to Yahoo," says Forrester analyst Chris G. Charron.
Most experts are placing bets on AOL, with its 12.5 million subscribers--who account for 36% of the Web traffic that comes from households. And Microsoft gets a thumbs-up because, well, it's Microsoft. Although the software giant's online service Microsoft Network has been a huge disappointment, its new portal, MSN.COM, launched for the most part in late August, is expected to hit the mark with Netizens.
But it's tiny 600-person Yahoo that gets the most nods. It was first to market with a detailed search service, first to go public, first to turn an annual profit, and first to go mainstream by slapping its zany name on TV.
Now, Yahoo is promising to go where no portal has gone before--to telephones, televisions, pagers, handheld organizers, and the like. Koogle and his troops are working feverishly so that by early next year, Yahoo's zippy Web pages are accessible anywhere and from any device.
Even sooner, perhaps by yearend, the company plans to give its registered users the velvet-glove treatment by offering a so-called Yahoo wallet. This would allow users to register their credit cards and shipping addresses with Yahoo. Then, when they shop anywhere on the Web, they can take their virtual Yahoo wallet with them to make purchases instantly. As with credit cards, Yahoo will keep a tab and present a monthly online bill. "We want to build the biggest company we can," vows the 47-year-old Koogle. "We've taken the lid off."
The method in Yahoo's tactics is nothing short of madness. Indeed, the company's motto demands it: Do what's crazy, but not stupid. Nowhere has this principle been stronger than in Yahoo's branding campaigns. By conjuring up a cool California image--hip but not rad, easy-to-use but not simplistic--it has managed to create a cultlike following not unlike that of Apple Computer Inc.'s Macintosh.
CASHING IN ON CACHET. Today, the Yahoo name is scrawled on seemingly every available surface. At the hockey rink of the San Jose Sharks, it's on the Zamboni ice-shaving machine. It's wrapped around tins of breath mints. It's on Slinkys, parachutes, skateboards, sailboats, surfboards, yo-yos, and kazoos. And the purple and yellow letters will soon appear on shoes, a music CD, the ER show, and the upcoming Ron Howard movie Ed TV. The best part: Yahoo has paid barely a whisper for all this publicity. In its early days, the company bartered for placement, but now--since gaining cachet--it gets much of this gratis.
Truth be told, the Yahoo brand may be the company's biggest asset. While rivals such as Excite or Infoseek may match Yahoo's information, services, and shopping, few have come close to its branding. Some 44% of Internet users know Yahoo, according to Intelliquest Inc.--more than are familiar with Excite, Lycos, or even Microsoft (table, page 72). Only AOL and Netscape are better known. "The name contains the promise of the product," says Owen Shapiro, senior analyst at market and brand research firm Leo J. Shapiro & Associates. "It reinforces the idea that when I go to Yahoo, I'll be so pleased I'll be Yahooing afterwards."
Although the company has helped define Internet branding, it must now keep redefining it to stay ahead of deep-pocketed rivals such as NBC. Yahoo was the first Net upstart to hit the airwaves with a series of humorous TV commercials in 1996 (Do you Yahoo!? remains a company tagline). But TV ads alone just won't cut it anymore. Now, Yahoo is trying to go one step further with product placements on TV's Ally McBeal and Caroline in the City. And in an Aug. 27 announcement, Yahoo linked its brand with the likes of the Oakland Athletics baseball team and the popular Comedy Central cable channel by forming online clubs for their fans.
HUE AND CRY. In a stab to get beyond T-shirts, of which it already has 20 different varieties, it licensed the logo to Gregory Mountain Sports, which is making computer bags to be sold in Staples Inc. and REI stores this fall. "We want a name that will stand the test of time," says Karen Edwards, vice-president for brand marketing, who joined Yahoo in January, 1996, after having done battle in the trenches at computer maker Apple's ad agency BBDO Worldwide Inc. Edwards is so gung ho that she planted her Palo Alto (Calif.) garden this summer with purple petunias and yellow gladioli--the company's colors.
No doubt Yahoo's power brand will be one of its greatest weapons in fending off the coming assault. So, too, will be its healthy bank account. The company is sitting on almost $400 million in cash, thanks in part to a $250 million investment on July 8 by Softbank Corp., which now owns 31% of Yahoo. This is part of Softbank's strategy of Internet investments, including stakes in E*Trade and GeoCities. The Softbank money, not to mention Yahoo's stock, will come in handy as Koogle pursues a more aggressive acquisition strategy than in the past. Yahoo has made only four acquisitions so far, including the $49 million stock purchase of ViaWeb. But with greater competition and a need to keep expanding its services, Koogle says more are in the offing.
Apart from cold, hard cash, Yahoo has its stock price going for it--so long as it stays aloft. Compared with tech dynamo Microsoft, with a share price 2.7 times its projected 1999 earnings growth rate, Yahoo seems pricey at 4.1 times expected earnings growth. For Yahoo to be valued the same as Microsoft, it would have to hike earnings 66% next year--well above the 45% increase analysts are forecasting. Nonetheless, 14 out of 20 analysts rate the stock a buy. Why? Most say they expect the company will remain a leader in portals, cashing in handsomely in coming years. A big help: Yahoo boasts gross margins of 88%, just shy of Microsoft's 92%. "Yahoo has the potential to emerge as the first pure Internet giant," says analyst Paul Noglows of Hambrecht & Quist Inc.
But first, it will have to maintain its knack for giving Netizens what they want. That's why its executives have been in nonstop meetings (in sparsely furnished conference rooms bearing names such as Decent or Consistent--just so that people will be forced to say they are "in Decent" or "in Consistent") to discuss the company's tenuous future. "We are in the business of obsoleting Yahoo," says 29-year-old co-founder Jerry Yang, whose success has made him so popular in his parents' home country of Taiwan that he registers in hotels under an assumed name to avoid a crush of autograph-seekers.
It wasn't always that way. When Yang and David Filo were Stanford University graduate engineering students in late 1993, they were about as far away from Big Business as twentysomethings could be. Instead of writing dissertations, they spent most of their time surfing the Web and building lists of their favorite sites. On a whim, they decided to post their list, dubbed "Jerry's Guide to the World Wide Web." The reaction was explosive. So in 1995, the dissertations were chucked--and so was the list's name. Instead, Yahoo, which technically stands for Yet Another Hierarchical Officious Oracle, was born.
In the future, playing up this friendly neighborhood feel of Yahoo and downplaying its commercialization will be key to getting surfers to stick around. According to Media Metrix Inc., users hang out at Yahoo's site an average of nine minutes daily, vs. about 42 for rival AOL's proprietary service. Yahoo is trying to increase that through its Hollywoodesque programming. On July 21, for instance, more than 18,000 people asked more than 100,000 questions during an online discussion with teen heartthrobs Hanson. And during the recent World Cup, Yahoo's multilingual site drew an estimated 13.5 million people--4 million from outside the U.S.
But with Netscape, Disney, and others on its heels, Yahoo will have to do more. Such as get personal. While all the major portals offer personalized services, Yahoo leads the pack with 18 million consumers registered on My Yahoo, a feature that stores personal data, such as ZIP codes and the occupations of people who choose to use it. That information, which is kept confidential, allows Yahoo to tailor advertisements, merchant's wares, and other services to consumers who would be most interested in them.
USER-INTIMATE. Yahoo plans to capitalize on knowing people's tastes by using push technology to tailor information and deliver Web material to the desktop. "I can picture Yahoo as a big depository for people's preferences and consumption patterns," explains Koogle, who is known as "T.K." around the office. "We'll have the ability to notify people of things they should tune into."
Or buy. At the moment, when it comes to E-commerce, the job of a portal is to send as much traffic to its partners' and advertisers' home pages as possible. But Yahoo hopes to do even more, including suggesting items for purchase based on an individual's preferences and past buying behavior. It also wants to launch an online billing and buying service. Yahoo already has a relationship with Visa International and is talking with Intuit Inc. and others about the venture. "We can be a central buying service," explains Chief Operating Officer Jeffrey Mallett, 34.
That's a shrewd move for Yahoo, which, like other portals, expects E-commerce to contribute a bigger piece of its revenue pie. Currently, E-commerce is expected to bring in some $42 million, or about 25% of Yahoo's projected 1998 revenue of $170 million. The rest comes from advertising. But Koogle expects that E-commerce will climb sharply within a year. Yahoo's popular finance site, for instance, where Media Metrix says 1.5 million users each month spend roughly 24 minutes of their time, may alone be worth $100 million in revenues from ads and other commerce within a year, say analysts.
And then there's expansion overseas. Yahoo is currently operating in nine different languages in 14 countries, including Australia, China, and Germany. Yahoo Japan is the most popular Web site in that country, where 10 million people are online. Overall, Yahoo estimates that 30% of its traffic comes from outside North America.
Will all this be enough? It's too early to tell--at least until Disney, Microsoft, and others play their hands. Rival Lycos, for one, nearly matches Yahoo's international record. It is in 11 countries in Europe alone. And archrival AOL shows no signs of slowing. It boasts a boatload of subscribers to its proprietary service and has plans to launch a new Web portal this month based on its recently acquired ICQ instant messaging service. ICQ (short for "I seek you") has nearly 7.5 million active users. Its wild popularity stems from its focus on a mix of E-mail and chat called instant messaging. The move is expected to appeal to hip young Netizens and to fill a void left by AOL's less-than-stellar Web site, AOL.com.
TURBOCHARGED ADS. The Dulles (Va.) company raked in $2.6 billion in revenues in 1998, 15 times Yahoo's expected revenues. Given that, AOL executives say that not even high-flying Yahoo will be able to threaten AOL's bright future. "Everyone is changing to be more like AOL," says President and Chief Operating Officer Robert W. Pittman. "But no one is going to out-AOL AOL." CEO Stephen M. Case takes a more measured approach: "We just need to make sure we're innovating rapidly. That's really the way to fend off any competitive threats."
That's what NBC thinks, too. But first, its focus will be on branding--an area that Yahoo has largely dominated. On July 27, NBC began airing a quirky ad campaign aimed at making Snap! a household name. NBC says the ads, with the tag line "Don't suffer from information overload. Snap! Out of It," should reach some 400 million viewers in the summer, and double that in the fourth quarter. "We think we can create a success with Snap! by bringing it to the attention of a much larger audience," says NBC President and CEO Robert C. Wright.
The Disney-Infoseek combo also is about to turbocharge its promotion efforts. In addition to TV, Disney will use its movies, theme parks, and cruise ships to raise Infoseek's profile. But it may not be known as Infoseek for long. By the end of the year, the alliance will unveil a new portal that will serve as an umbrella for Disney's roughly 25 Web properties. For its part, Excite is hot on Yahoo's trail, with a host of new services and promotional ventures of its own. Ditto for Netscape. Says Michael J. Homer, executive vice-president at Netscape's portal Netcenter: "It takes exactly one click for someone to never be a Yahoo user again."
Even before Yahoo feels the competitive heat, its fate depends largely on advertising. Today, the Internet is still an unruly frontier many are unwilling to bet on. The sugar daddy of all advertisers, Procter & Gamble Co., for instance, spends just $10 million on Net ads annually, out of its $3 billion ad budget. Executives from several major companies said at an Aug. 20 online ad conference that their puny Web spending wouldn't go up much until electronic ads become more consumer-friendly and interactive and until their effectiveness can be better measured.
Even an Internet startup is not convinced. Chris Larsen, CEO of Palo Alto's E-Loan Inc., an online mortgage business, says his company does better relying on traditional media for promotion than on the portals. In July, E-loan spent $250,000 on radio ads in California and Washington. The cost per customer: about $200, with about a 2% conversion rate on resulting loan applications. By contrast, Larsen's online deals cost him at least $300 a customer, with a conversion rate of just 0.5%. "Long-term, we think traditional media are the way to develop the brand," says Larsen. "I don't want to be too dependent on portals."
And as consumers get more Net-savvy, they may not need a helping portal hand. Jerry Kaplan, CEO of Internet auction house ONSALE Inc., says his company has seen its traffic from portals shrink faster than a cheap T-shirt in the past year. He figures the drop stems from an increased awareness of ONSALE's brand. "The next turn of the crank in Internet commerce will be that certain sites will emerge as destinations on their own, thereby eliminating the necessity to buy a broad presence on the portal sites," he says.
Koogle concedes that some businesses, particularly those with the best-known names, won't need to rely on Yahoo and other portals to attract online customers or build brand awareness. But he says most merchants will flock to them for their services, strong distribution, and loyal following. Media Metrix says 51% of Net surfers at work and 42% of those at home use Yahoo at least occasionally. That powerful presence is expected to keep the ad dollars rolling in. Forrester figures Yahoo will nab at least a quarter of all portal ad money in 2002.
That's why E*Trade Group Inc. CEO Christos M. Cotsakos, whose Internet brokerage put up millions of dollars on Aug. 6 for ads and access to Yahoo's finance channel customers, says that banking on Yahoo is a no-brainer. "It's like playing Double Jeopardy," says Cotsakos. "You place your biggest bets on the squares that will give you the best return. And Yahoo is the Double Jeopardy Square on the Internet."
Koogle had better hope so. Should the economic model for this emerging business start to fizzle, the coming competitive assault will be the least of Yahoo's worries. It could take years to turn the P&Gs of the world into Net believers, placing Yahoo squarely on the come line. For now, though, all hands at the company's spartan headquarters are focused on the bout before them. And they know that even one misstep will be seized upon by a legion of Yahoo wannabes. "There's a vast universe waiting for Yahoo to fall or stumble," says Michael Moritz, a Yahoo board member. If Yahoo doesn't gobble them up first.