Silicon Insider: Yahoo Blinked

June 21, 2007 — -- When we began the current tech boom three or so years ago, it was already pretty apparent where the great competitive battles would be. We could even predict the antagonists. What wasn't so obvious -- and that has been proven by subsequent events -- is who the winners would be.

Indeed, in many of these duels, the least likely contender has been triumphant.

For example, in Intel versus Advanced Micro Devices, AMD had caught up so quickly, achieving parity in microprocessors after a 20-year race, it seemed inevitable that the company would at last sprint on ahead of its far bigger and more famous competitor.

But it was AMD that stumbled, and now is in pretty desperate shape. But that still didn't make Intel the big winner; seemingly out of the blue, Samsung, propelled not only by its strength across the chip business but in consumer products as well, ran all over Intel. The result was that Intel, for three decades the most consistently successful, and often the most powerful, company in tech is now the sick man of Silicon Valley. This has been the first electronics boom since the 1960s that Intel hasn't led.

Meanwhile, in the personal computer industry, Dell was dominant, IBM was strong, Gateway was faltering and Sony was ascendant. Giant Hewlett-Packard, choking on the acquisition of Compaq, and led by a CEO who seemed to love the limelight even while she was destroying the morale of her troops, seemed dazed and confused.

Who would have guessed that these days HP, under a tough new CEO, would go back to basics and crush all competitors? Or that Dell, so supremely confident, would suddenly lose its way, even its sense of purpose, and start to fall apart? Or that IBM, the 20th century's defining computer company, would leave the computer industry altogether, selling off its PC business to China?

It was also generally assumed at the beginning of the current upturn that Microsoft would remain the Evil Empire, crushing all in its path, dominating both the software (and by extension, hardware) and Internet worlds, its monopoly driven home by the expected announcement, in 2005, of the new Vista operating system.

Well, nobody seems to worry much about Microsoft these days, as it has slowly faded into a big, lumbering dinosaur. And Vista, of course, was two years late and almost sunk the personal computer business in the process.

What was accurately predicted at the time was that Apple, armed with the redoubtable iPod, the first great consumer product of the century, would be a major player in this boom, but few would have guessed that within a few short years this product line would become so important to the company that Apple, the company synonymous with the personal computer, would drop the word "computer" from its name.

And that brings us to the other, much anticipated duel: Google versus Yahoo.

Open vs. Closed Business Models

This fight had all of the right ingredients. Here were two companies that had pioneered their own corners of the Web -- indeed, if you studied their histories, Yahoo in the mid-1990s and Google in the mid-2000s were almost identical companies. It was also a David vs. David fight:

Google was the young, plucky darling of the technorati, while Yahoo had suffered a near-death experience when the dot.com bubble burst but had managed to crawl out of the wreckage and regain its original glory. Both companies were also founded by pairs of nonbusinessey Stanford grads, and run by tough and old industry veterans. Google had Eric Schmidt, a one-time top scientist at Sun Microsystems who had his head handed to him by Microsoft as CEO of Novell. Meanwhile, Yahoo had Terry Semel, a tough New Yorker who'd made his bones in Hollywood.

The big difference between the two companies was that old dichotomy in the tech world: open systems versus closed. Google was ostensibly a free service, available to anyone who visited its Web site. Yahoo was like a great fortified city: Once you became a citizen, you enjoyed vast entertainments, services and other treats, but you were never allowed to leave.

In these battles between open and closed business models, we democratically-minded entrepreneur types always expect the "open" competitor to win -- if only because that seems the most decent way to behave. But experience shows that, in business, being accommodating and letting others play on your field, is not always the best strategy. Just ask Steve Jobs.

So, the mano a mano between Google and Yahoo seemed inevitable. It was even called the first great high tech business duel of the new century.

And yet, that isn't quite what happened.

At the time, I wasn't convinced that this fight was going to happen. In a cover story I wrote at the time for Wired, having spent a couple months interviewing Semel, Yang and other top folks at Yahoo, I came away convinced that a whole other scenario was about to unfold.

As I saw it, Google and Yahoo, while appearing on a collision course, would in fact sail right past each other in pursuit of other, bigger targets. Google, I was convinced, was really planning to attack the biggest fish of all, Microsoft, and would do so stealthfully by offering one free service after another and slowly chipping away at Microsoft's base. It would be Schmidt's Revenge.

Is Google Unstoppable?

That prediction has turned out to be pretty accurate. In fact, Google is looking so unstoppable these days -- much like Microsoft in the mid-1990s -- that it has begun to replace the old giant as the new tech bugaboo of legislators, Europeans and paranoid college kids.

Nobody worries about Gates and Co. these days, but you can be sure that every advertising agency, media company, software application company, Web service and new start-up in the world has Google somewhere in its business strategy.

Meanwhile, I was convinced that Yahoo was headed in the other direction, not toward Seattle, but Hollywood.

Its closed business model, its vast user base (a sizable percentage of all of the world's Internet hits on a given day) and Semel's deep connections in Hollywood convinced me that Yahoo was going to turn itself into the primary distribution channel for the entertainment industry.

That it would be the place to go to download first-run movies or pay-per-view television or the latest music videos. And, a year later, when Yahoo announced that it was opening a major facility in Los Angeles, that only seemed to confirm the company's strategy.

But it never happened -- or at least hasn't happened yet. In the meantime, we have iMovies, YouTube, and now even NetFlix offering downloadable films. This should have been Yahoo's turf, but it is no more a player in this world than AOL.

Even the company's apparent fall-back position, that of being a provider of complete neighborhood Web services -- reviews of local stores and restaurants, online ordering, etc. -- has been no great shakes, certainly nothing like the iPhone commercials suggest will be available on that much-expected product.

In fact, Yahoo didn't even exploit the one thing it was already brilliant at: online communities, allowing start-ups like MySpace and FaceBook to steal that market away.

So what happened? Who knows? Some intrepid reporter or author will find out one of these days. What is clear is that Yahoo, like Google, appeared to have a business strategy that would make it a world-beater. And, arguably, Yahoo's was even more ambitious, and with an even bigger potential payoff, than Google's.

Google succeeded, and is now the hottest company in the world. Yahoo dithered, failed and is now stalled -- and the (predictable) news this week was that Terry Semel had stepped down (or more precisely, up) as Yahoo CEO, remaining as chairman. His CEO slot is being taken over by co-founder Jerry Yang.

Yang is very smart, as you would assume for a founder of a tech giant, but he is also a very good businessman, which you might not expect. Still, no one expects him to stay in the job for long. Rather, he will likely preside over some major move by the company as it resets itself to return to competitiveness.

How will that happen? Well, it's too late for Yahoo to go back to its original plan. No, it will take a very bold move to get the company back in the game. One popular rumor is that the Yang and company are in negotiations with Rupert Murdoch (News Corp.) to acquire MySpace in exchange for some sizable percentage of the company's ownership.

Not a bad idea. But a second, even more intriguing rumor, has the advantage of an almost poetic justice: that Yahoo is in secret negotiations to be bought by Microsoft. Were this to occur, coming at the end of the current tech boom, it would bring a kind of completeness to the expectations of three years ago. Google and Yahoo would indeed duel at last, even as Google played out its long-planned Armageddon with Microsoft.

Tad's Tab: The latest from the teen tech trenches, from Michael Malone's 15-year-old son, Tad Malone:

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This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone, once called the Boswell of Silicon Valley, is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is best-known as the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com "Silicon Insider" columnist since 2000.