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

by Catherine Holahan

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 BusinessWeek.com, 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.