It is now official that Tumblr will become part of Yahoo. Marissa announced the news in style with an animated gif. I have been lucky to be part of Tumblr’s journey as an angel investor and as an active blogger on the service since February 2008.
I am excited about the combination with Yahoo. When Marissa took over Yahoo, I expected that acquisitions would play a role in her transformation of the company. At the time I wrote that the ideal target would be “startups that have very talented people and also interesting products but could benefit from the scale of Yahoo.” Tumblr fits that bill perfectly. It has super talented people and a really interesting product. It can also benefit from Yahoo’s scale — both for reducing its infrastructure cost and for selling the wonderfully nonintrusive ads that appear occasionally in the Tumblr dashboard.
I am also excited because this will finally bring Yahoo to New York City. During the dotcom days Yahoo moved all of its acquisitions out West (e.g. Hotjobs) which was a tremendous talent drain for New York. Now most of the big Internet companies will have a strong presence here which is great for the local community. These days acquiring companies understand the importance of New York and are enabling the local teams to build out a stronger presence (e.g. eBay and Hunch, Adobe and Behance). We have Google to thank for starting this trend.
And now it’s time for me to reply to all my friends who have sent congratulations over the last few days. I couldn’t reply because the deal had not been officially announced yet. Which reminds me: to all the journalists who sent “congrats” notes fishing for an official confirmation — nice try and better luck next time!
A number of people have published lists of things that Marissa Mayer should fix as the new CEO of Yahoo. Several of these recommendations include firing a lot of people. And we can now also read Marissa’s first memo to Yahoo employees, which clearly tries to alleviate fears of layoffs. My own theory of organizational change is a bit different and it is based on observations of several successful and failed turnarounds going back to my days as a management consultant. You can’t have change without firing some people but it is far more important to fire the right people than to fire a lot of them.
In particular, resistance to organizational change tends to be concentrated in the middle management layer of large companies (and whatever else it may be, Yahoo is very much a large company). That’s especially true for companies that have been in a rut for a while. The reason is that adverse selection tends to operate most strongly at this layer. People who want a career at a dynamic company leave and the ones who stay in middle management at a stagnating company are frequently the ones best at “distributional” politics.
Usually what happens following a CEO change is that other high level positions are also up for grabs and a lot of focus goes into recruiting senior talent. But if that is not accompanied by a fairly significant turnover of the middle management layer it is unlikely to succeed. All the ideas for new directions and energy coming from the top will get absorbed in the middle. And when that happens employees quickly get cynical because they conclude that there will be no real change.
In the current environment Marissa has some interesting opportunities for shaking up the middle management ranks. In addition to promoting from within, she can pick up a number of startups that have very talented people and also interesting products but could benefit from the scale of Yahoo. That is more true today than it has been in a long time due to the amazing levels of startup formation over the past few years. Yahoo still has a market cap of nearly $20 billion and so could be somewhat aggressive with stock without causing massive dilution.
I am looking forward to see what Marissa decides to do with Yahoo. But more than anything I will be looking for signs that she is shaking up middle management.
If Yahoo had any shred of credibility left with developers then it has succeeded in destroying that with its misguided patent lawsuit against Facebook. But the suit isn’t all bad. It has the potential to become a catalytic event for broader social awareness of the perils of software patents, similar to how the SOPA/PIPA battle moved copyright and its enforcement into more of a mainstream issue. That was sort of the gist of Mark Cuban’s post.
The first group of people who should really start to get engaged are engineers. After all, they are the one’s whose work becomes — as Andy Baio put it — “weaponized" in the hands of corporations. A first step here might be to change how patent assignment works. Engineers at a startup could require that assignment is made only for defensive purposes instead of unconditionally. This would prevent the kind of fate that befalls so many of the patents when companies are either acquired, get into trouble or fail (and their patents are acquired by a non-practicing entity, better known as a troll).
As another approach (albeit one that might take more time to construct), companies could assign their patents to a pool that would be used for defensive purposes only. RPX does something along those lines but seems to be geared at big corporations and in RPX’s case the patents are still available for offensive purposes as well (at least as far as I know).
Between mobilizing developers and approaches to peer producing research to invalidate patents, I believe it is possible to build enough outside pressure on the system to achieve some real change.
Yesterday, Yahoo fired CEO Carol Bartz. Whether or not you agree with that, one thing is clear: firing someone over the phone is wrong. Much as it may be difficult this is a message that should be delivered in person if at all possible (for a remote contractor might have to use Skype). Hearing that Bartz was fired over the phone reminded me not just of “Up In the Air” but also of struggles with firing that I have encountered myself.
Firing is probably the hardest thing to do and I was terrible at it at first as an entrepreneur. I put off firing my first mis-hire (a developer) for weeks while I was looking for ways to fix a situation that couldn’t and shouldn’t have been salvaged. There were (and often are) difficult additional considerations such as the employee’s personal financial situation. In the end once I had done it the impact on team morale and productivity was tremendous and I realized I had dithered. A tough lesson to learn and while firing never got any emotionally easier for me at least I knew not to let it drag.
I know of a subsequently very successful entrepreneur who in the early days of his first company was so mortified of having to fire someone that he sent in his wife instead to do it. When the employee in question caught on to what was happening, he said to the wife: “You can’t fire me, you don’t even work here” to which she apparently replied “yes, that’s the point — neither do you.” The next day the entrepreneur decided he needed to hire a right hand person who could help with this going forward!
Always keep in mind that much as the firing may be difficult for you, it is more difficult for the person being fired and putting it off or doing it in a disrespectful fashion only makes matters worse.
After at first appearing to be shutting it down, Yahoo is now apparently selling delicious (or possibly giving it away). Google or Microsoft should be first in line to pick it up, but especially Google. Why? Because delicious would help immensely with battling spam and content farms, something many folks have criticized Google for lately, including Jeff Atwood and Marco Arment. That was of course the original idea behind Yahoo buying delicious — at that time Yahoo was still very much in the search business. Delicious has a lot of signal in it that allows for distinguishing between real accounts and spam accounts (and more could have been added under better stewardship of the service). The real accounts in turn can be used as one input into search results that can help improve the quality of results for everyone. Of course for a delicious user the obvious thing to do would be to include pages remembered on delicious in the results. As an active user of delicious I would be delighted for it to find the home that it always deserved.
Hats off to Mark Zuckerberg and the entire team at Facebook. They are managing that most impressive feat of innovating at scale. They are also incredibly ambitious in what they want to accomplish. The goal seems nothing short of one identity and one graph to “rule them all.” With over 400 million users worldwide and a sign on system that is being widely adopted this ambition doesn’t seem crazy. Especially when you layer on top of this the possibility that soon many of these users might have Facebook currency that could be used by sites to implement 1-click purchasing (and by venues to enable RFID based payments via Facebook presence).
But I see at least one flaw with this plan for domination. I simply don’t believe that there is a single social graph that makes sense. I may very well follow someone’s booksmarks on del.icio.us that I don’t want to have any other relationship with. Or take the group of people that I feel comfortable sharing my foursquare checkins with — these are all people I trust and would enjoy if they showed up right there and then. That group in turn is different from the people I work with on Google docs for various projects which is why I would be nervous about using the Microsoft docs connected to Facebook. Trying to shoe-horn all of these into a single graph is unlikely to work well.
As a little historical aside. There is a bit of a personal irony in the huge noise around the Facebook “Like” button. Yahoo could have had this in 2005 following their acquisition of del.icio.us if they had started to promote it to their users and to content sites!
This afternoon I am participating on a panel for Yahoo! OpenHack NYC titled “Building on Others’ APIs: A Strong Foundation or Recipe for Disaster.” That will make a good complement to yesterday’s discussion at the USV portfolio summit where we spoke about the importance of having an API. In preparation for the summit, I asked Oren Michels from Mashery whether he had a good example illustrating the importance of having an API. Oren kindly send along this impressive chart:
Now of course this does not qualify as scientific evidence, but it shows Compete’s growth starting to really take off exactly around the time that they open up their API. Also, within the USV portfolio some of the fastest growing companies have a significant part of their growth coming from their APIs.
There are many benefits to having an API that can help account for the incremental growth. By using the API, third parties can support additional use cases, user experiences and users that the company itself would not have the resources to pursue. But the discussion also covered some of the potential issues. If your service does not have sufficiently strong network effects or other tie ins, then having an API might reduce switching cost for users and allow others to create a “plug compatible” competitive offering. Also if you believe that control over the user experience is critical then having third parties create potentially inferior or conflicting experiences might be an issue. Finally, if you are trying to innovate very rapidly, then it might not be possible to offer a sufficiently stable and meaningful API to have adoption, or conversely if you have a massively adoped API it might hinder your ability to innovate. While I agree that these are potential issues, I believe that in each case it would be important to question the relative importance compared to the growth benefits of having an API.
So what about building on someone else’s API (the topic of this afternoon)? For starters everyone developing any code of course uses APIs all the time, if only the ones provided by third party libraries or say databases. So the question would really seem to be about building on APIs that will supply core functionality for your service and for which you are betting on a single company which is providing them. There seem to be two key risks in doing so:
- First, that the API goes down or is taken down and makes your own service unavailable as a result.
- Second, that the provider of the API will eventually try to extract a “tax” on your profits.
There are ways to reduce those threats, such as developing in a way where if competitive APIs become available you could switch easily, but ultimately these are risks that cannot be eliminated. The more important question therefore should be why someone else’s API is central to your service to begin with and what this says about the ultimate value of your service. In many cases, I believe the answer to that question is that it imposes serious limitations, in which case you should focus on minimizing the cost of launching and maintaining your service as the primary means of mitigating risk.
Should be a fun discussion and I look forward to seeing some you there (that is if not everyone goes and listens to Rasmus Lerdorf instead …).
A while back, I wrote that display advertising is too complicated. Today Google announced their entry into the display ad exchange business. Both in their announcement and in this conversation with Neal Mohan from Google, the idea of bringing simplicity to the market is cited as a major driving force. Google also describes the system as if it were the first display ad exchange ever.
Of course the reality is a bit different, with Yahoo/Right Media and others having offered exchange capabilities for quite some time. For advertisers and agencies who have already been using exchanges this simply means that another exchange is available. What remains to be seen is if Google can succeed in pulling smaller advertisers into display the way they did with AdWords and AdSense.
In the meantime, however, if the Justice Department is paying attention, they should stop wasting time reviewing the Yahoo-Microsoft search deal. Google now has a complete display offering, so for there to be a credible second player that can cover both search and display, the Yahoo-Microsoft search deal is actually a competitive necessity.
The top link on techmeme right now is yesterday’s post by Jason Calacanis titled “Yahoo committed seppukku today.” It is worth reading because it powerfully (and hilariously) lays out the position that handing over search to Microsoft is a huge mistake for Yahoo. It is a position I am very familiar with, because I made much of the same argument (although in a less entertaining fashion) last May. But it is more than a year later and I am not sure the logic still applies.
First, Yahoo has lost a ton of talent along the way. Some of that talent went to Microsoft. Most notably, Microsoft recruited Qi Lu, one of Yahoo’s key search engineers in December of last year.
Second, despite some slight gains in search share (from hovering just above 20% for most of 2008 to slightly above 21% in early parts of 2009), Yahoo’s search monetization has been falling. In Q2 they reported a 15% decline in search ad revenues at a time when Google reported a 3% increase.
Third, search may simply not be a winnable category for some time for anyone other than the leader. It is worth remembering that the arms race with the US was a key contributing factor in the demise of the Soviet Union. So if you are Yahoo and you are behind and slipping (see first two points), do you really want to keep plowing money into search? Might be smarter to let someone with deeper pockets wage the fight on your behalf and wait it out.
Fourth, the economics of the deal with Microsoft might be attractive. On one hand, there was no upfront, but on the other there are a number of guarantees, such as “Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 percent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement” and “Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.” Both of these are difficult to interpret since not enough detail is provided, but it sounds intriguing.
Bottomline is that in May 2008 I shared the same point of view that Jason published yesterday. But at the end of July 2009 a lot has happened and now I am thinking this could actually turn out to be a smart move. The initial reaction clearly suggested the stock market did not think so. But this seems more like a knee jerk reaction to me. I think it will be a couple of years before one can properly judge this decision.
Fred posted on the weekend about giving Bing a chance. I am doing the same this week having set Bing as the default search engine in Firefox. My main reason is that I firmly believe in the need for search diversity. A search mono-culture would be bad for the Internet for several reasons:
- Too much power. Search is so central to the web experience that it provides a lot of power. That power should not be concentrated in a single player with a very high market share. I am not suggesting that Google would necessarily on purpose abuse its power in a big way, but with employees who have large equity stakes in a publicly traded company there is no doubt that decisions on the margin are influenced by a desire to maximize profits.
- Self-reenforcing effects. Google has an algorithm which it has been varying and improving over time, but it is a fixed algorithm none-theless. This means that certain sites benefit by appearing higher up in the results which drives more traffic towards those sites. More traffic, however indirectly, translates into more resources for a site and if handled properly will allow those sites to maintain or even improve their ranking.
- Single point of failure. The great resilience of the Internet depends on there being no single points of failure. Google itself is of course architected not to have any single points of failure but one level up it is still a single system. It’s not even necessary for it to be entirely unavailable. It could simply be an issue of an important bug, such as was seen at the end of January, when for a brief moment Google claimed for every site that “this site may harm your computer.”
For these reasons, I would feel better if there were at least three major players in search (hoping that Yahoo will revive its efforts too). That’s why I am giving Bing a try. In fact, it would be great to have a plug-in that randomizes between your choice of providers as a way to wean oneself off over-reliance on a single search engine.