Yahoo's Joyful, Difficult Journey

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When Panama finally launched last February, it got some good reviews but struck many as too little, too late (BusinessWeek.com, 2/26/07). Google not only kept growing at many times the rate of Yahoo, it even launched a deal last April to buy DoubleClick, which if approved would give Google a huge foothold in Yahoo's mainstay, online display ads.

Missed Opportunities

Meantime, Yahoo missed one huge opportunity after another. In 2005, it was said to be interested in buying the popular social network MySpace, but lost out to News Corp. In 2006, Google snatched up the hot video-sharing site YouTube, which had quickly grown in popularity even as people within Yahoo were pushing for the company to create much the same kind of service from its large stable of video resources and properties. The same year, Yahoo offered around $1 billion for another hot social network, Facebook, but was spurned. Last year, Microsoft swooped in with a $240 million purchase of a small stake that valued Facebook at a stunning $15 billion.

Yahoo has made some mildly successful Web service acquisitions, such as buying the popular photo-sharing site Flickr; and some promising ones on the advertising side, purchasing ad exchange Right Media and targeted-ad network BlueLithium last year. But none of them halted Yahoo's decline. As profits plummeted last year and executive after executive fled, it was becoming clear that Semel's days were numbered. He stepped down last June (BusinessWeek.com, 6/19/07), replaced by co-founder Jerry Yang and new President Susan Decker.

Ultimately, what Yahoo missed, says Silicon Valley strategy consultant Sramana Mitra, is "a visceral understanding of how the Web is going to evolve." In particular, the quintessential Web 1.0 company failed to make the transition to Web 2.0, which involves creating services that tap the talents and efforts of users themselves: the volunteer-written encyclopedia Wikipedia, video-sharing sites like YouTube, and even Google, whose very search results are based on algorithms that track the links people make from their Web sites to others.

But despite all the missteps, few people would have imagined that Yahoo would become nothing more than a pawn in the titanic struggle between Google and Microsoft to define and dominate the future of the Internet. Indeed, one former senior executive who knows Yang said at the time he took over as CEO: "This is not a flip for him. He really does want the company back on the right track." But after failing to do that in his first six months at the top, his chance to save the company he co-founded may have passed.

Hof is BusinessWeek's Silicon Valley bureau chief .