An interesting little point about Yahoo

From the Facebook results:

Facebook, which was founded in a Harvard dorm room in 2004 and joined the stock market in 2012, reported a 59pc rise in quarterly revenues to $6.44bn, while net income increased 186pc to $2.05bn. Both were ahead of forecasts.

Meanwhile, costs were up a third to $3.7bn. Spending on research and development rose 25pc to $1.46bn.

Yes, obviously, this doesn’t translate directly to Yahoo. But the general point stands. A large chunk of the costs of running these internet thingies is in trying to develop what to do next. If you accept that the basic idea is done, that you’ll not pivot to something else, then there’s good money to be made by simply running what already exists. Sweat the extant business that is, invest nothing in it. Pull that R&D spending out and profits do rather rise, don’t they?

The poster child for this is of course AOL. Their dial up business (no, seriously) still throws off rivers of cash.

To Yahoo, there’s an argument, which obviously I’ve not gone and checked but I think it could well be valid, that if Mayer had just said “Yahoo will die in a decade” therefore we’ll invest nothing and just send the rivers of cash to shareholders then those shareholders would be better off. That billion spent on Tumblr for example, but also just the general underlying spending on trying to advance things rather than just maintain and extract.

Or, as many have found before, sweating a dying business can be much more profitable than trying to reinvent it.

The same could even be true of Microsoft……forget mobiles, search and all that, Windows and Office, sweat them for two decades and let the thing die.

13 thoughts on “An interesting little point about Yahoo”

  1. Quite. Shareholders can decide for themselves how to invest their profits, they don’t need mangers to decide on their behalf, especially when it comes to diversification / fundamental change of direction. Basic James Porter stuff.

  2. “as many have found before, sweating a dying business can be much more profitable”

    As the Daily Telegraph shows. Soon should be time to sell it on with its pension scheme in a shambles.

  3. That’s fine in theory; but you’re ignoring the second-order effects. What will your customers do if they find out you’re planning to run the company into the ground? Microsoft’s users will migrate to Apple or Google; YahooMail users will move to Gmail. And what about your employees? You’ll struggle to retain skilled workers when they realise there’s no chance of growth and that redundancy is constantly hanging over them.

    Given that you’re not allowed to lie to your shareholders, this strategy can only really work for privately-held companies.

  4. Quite so, which is why people who do it tend to take a public company private in order to do it. If someone did that to Yahoo 5 years ago (ignore the Alibaba stake for this) then I reckon they would be in profit by now.

  5. AOL’s dial-up business is only a small part of the company. It’s trying to be a media conglomerate: both producing and distributing content.

    Mind you, I think I can see where they went wrong. They caught a nasty case of SJW infection. From Wikipedia:

    In 2015, AOL received two Emmy nominations: one for MAKERS, a digital documentary series focusing on high-achieving women in male-dominated industries such as war, comedy, space, business, Hollywood and politics; and the other for True Trans With Laura Jane Grace [a documentary about a transgender musician].

  6. @Robbo “Basic James Porter stuff.” Would that be James Porter, the Glaswegian jeweller or James Porter the Catholic priest (thanks Wikipedia)?

    Mind you, their distant cousin Michael had a thing or two to say about cash cows.

  7. In principle it makes sense that shareholders should decide whether they want to spend loadsamoney on eg Tumblr, rather than management doing it for them. And spend money on start-ups (only the ones successful enough to reach IPO for most investors though) rather than splurge billions trying to create the “next big thing”.

    But was there an overall strategy that meant there could be synergies from gobbling up Flickr and tumblr? “Learn about customers” ie spy on them, for more personalised ads? Some advantage to bringing services under one roof, making it harder for customers to quit (extracting yourself from hosting mail AND photos with one provider is harder than just extracting yourself from the mail)?

    What was the strategic thinking? I’m assuming there was some…

  8. The only time I think of Yahoo is every now and then when the name pops up in the news and I am amazed that they are still around.

    In my little universe, Yahoo was visible in that brief time when “internet portals” were the rage: sometime between Altavista and the start of Google.

  9. @AndrewM “That’s fine in theory; but you’re ignoring the second-order effects. What will your customers do if they find out you’re planning to run the company into the ground? ”

    There is a world of difference between running the company into the ground and extracting the maximum cash flow from a company. The difference is usually called brand management – i.e. putting enough into the business to keep customers happy and the cash flowing without investing in something speculative. Most large conglomerates are a mix of cash cows and rising stars, and many of the cash cows are public companies.

    I would have called Dell computer a cash cow company for most of its life. Sure it had new products, but they were always just the latest Intel chipset and Seagate disk drive with Windows in a metal box. The key to their success was value, good service and brand management.

  10. Andrew M

    “What will your customers do if they find out you’re planning to run the company into the ground? Microsoft’s users will migrate to Apple or Google; YahooMail users will move to Gmail. And what about your employees? You’ll struggle to retain skilled workers when they realise there’s no chance of growth and that redundancy is constantly hanging over them.”

    Strikes me as overly pessimistic. You no longer need oodles of staff anyway. You will need staff to maintain the core product, perhaps add the odd feature to it to stop it looking totally antiquated as other services evolve, but no trying to launch exciting shiny new products to the line.

    If you’re doing that for ten, twenty years then that’s still a lifetime in tech terms, so job security for those kept on is unlikely to be a pressing issue. If you have customers happy with your (limited) service then you can just plough on until attrition has made it unprofitable to continue.

    The thing that would kill the customer base entirely is if it were clear that after X years, the thing would disappear entirely. If Microsoft announced they were not going to release a new version of Office but that current versions would continue to function, then through inertia I think a lot of people would continue to use them. But for web services it’s different – if I were told Google Docs were to be withdrawn in a year, I’d pull everything off it and start working offline. If I were told my email address was going to be pulled then I’d tell everyone that mattered that my address was changing ASAP and try to get everyone used to my new address.

    In reality though, defunct email providers just tend to migrate their customers to a new provider and let them keep the address. I imagine if Flickr shuts, some other image hosting site will pay to transfer customers across. Provided there’s a long term commitment that no emails are going to be culled, then a lot of email customers would sail happily on rather than be faffed with switching to a new address. Lots of people hate radical redesigns of the sites they’re used to anyway, so keeping things “classic” isn’t likely to trigger a mass exodus. One of my internet bank accounts has the same UI and site design it did back in 2001 – it was functional then, I can still do what I want now.

  11. Unfortunately much of the pharma industry seems to be in that state. Finding effective and safe new drugs that would prove profitable is getting harder and harder. So they close labs, merge companies, and generally give every sign of slowly melting away.

  12. Bloke in North Dorset

    It’s a while since I looked in to it but there’s still a lot of telemetry equipment around that only needs to report once a day or when some event occurs and only a few bytes of data or exchanged.

    The cost of upgrading both equipment and line to broadband isn’t worth the investment. It may happen as part of the replacement cycle but that will take some time.

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