An identity crisis gripping Yahoo! (YHOO) had reached Shakespearean proportions by late 2007, when Apple (AAPL) CEO Steve Jobs paid a visit to the company's Sunnyvale (Calif.) headquarters. Yahoo needed to decide whether it would focus foremost on media or technology, Jobs told the small group of assembled executives, according to one executive who attended the meeting. Jobs made it clear which side he favored: "We are in Silicon Valley," Jobs said, according to the former exec.
Which direction Yahoo would ultimately take became clear July 29, when it announced a partnership that, if approved, puts Microsoft (MSFT) in charge of Yahoo's search technology. With that, Yahoo would shelve a half-decade-long effort to rival Google (GOOG) in the lucrative market for search-related advertising and go further than ever to dismantle a culture of technological innovation, say engineers and former staffers.
True, Yahoo employs legions of engineers who work on products other than search, including e-mail, instant messaging, and mobile applications. But for many developers, search was by far the most technologically compelling. "While we had lots of technologies, it wasn't rocket science stuff," says Lowell Goss, who headed user experience for Yahoo before leaving in 2006. "Search is the rocket science stuff." Goss and other Yahoo alumni say that as Yahoo outsources search to Microsoft, a wave of top-tier engineers will likely depart, taking with them the inner geekiness that's fueled much success over the years.
How Content Became King Executives say Yahoo was electrified when it embarked on search. In 2002, Yahoo bought Inktomi, a startup that gave it the ability to "crawl" the Web for content. "The introduction of the search engine into Yahoo was a transformative cultural experience," says Raymie Stata, who's now chief architect for the company. "It injected a new type of technology that was important to the history of this company."
Yahoo's search engine evolved over the years, but lost its lead in the market as Google honed its search capabilities and made more money from ads placed alongside results. In the meantime, Terry Semel, CEO of Yahoo from 2001 to 2007, placed more emphasis on building premier content destinations like Yahoo Finance and Yahoo Sports. When founder Jerry Yang took the reins in 2007, he pledged to redirect the company's focus to cool new tech but he was ultimately undone by a growth slowdown and Google's widening lead in search. "Yahoo has been walking this tightrope between being a content company and being a search engine," says Danny Sullivan, editor-in-chief of Web site SearchEngineLand. "I think they've made the jump now" into content, he says. Yang was replaced by Carol Bartz in January.
The search surrender came as little surprise to many engineers who left the company after seeing this direction set. "I saw the writing on the wall," says one staffer who left earlier this year, and asked to remain anonymous because he currently deals with Yahoo and Microsoft in his work. "It was increasingly clear that search was not an area of investment for the company." He adds that many of his friends who remain at the company have already made plans to leave in light of the announcement. "When you throw in the towel [in search], I think you send a message that the company isn't able to keep up with one of the most challenging technological problems." An exodus of high-profile employees accelerated last year amid on-again, off-again takeover and partnership talks between Microsoft and Yahoo.
Stranded Web Developers Besides employees and users, the search deal may affect the thousands of Web developers who use Yahoo's open platforms like BOSS and SearchMonkey, which allow them to change the appearance and function of search results. In a blog post to developers on July 29, Chris Yeh, head of the Yahoo Developer Network, said that the future of these tools is uncertain. "Clearly, we'll need to work with Microsoft to determine what makes the most sense for you and for us," he wrote. In response, Ryan Parman commented: "The rumblings I've heard…make it sound like the morale at Yahoo is reaching all-time lows with this announcement. How long until people on the [the Yahoo User Interface] team (the product I use most) get fed up and quit? What happens to the product then?"
Yahoo agrees that many of its most talented engineers honed their abilities in search. But company representatives say over the years many have scattered into various roles throughout the company. And for those still in the search unit, new tech opportunities are taking shape, says Prabhakar Raghavan, head of Yahoo Labs. He says that although Microsoft's Bing search engine will be doing the work of indexing the Web and presenting relevant search results within Yahoo's pages, in-house engineers will have the freedom to build on top of those results. They'll focus on helping users keep up with the friends and information they're interested in, and being productive. "I fully expect technology and technologists will morph from doing what they used to do to conjuring up new experiences that let people do one of these two categories," Raghavan says.
Less Tension—and Fewer Jobs Former staffers say that a shift away from technology could lessen conflicts that sprouted between tech and media units. "There was always a rift between the engineering and the media side," says Vince Broady, who headed the entertainment unit from 2006 to 2008. He says he had little control over which engineers would be assigned to his projects, since they reported to executives rather than communicating directly. More than once, his projects were assigned to outsourced teams in India, which meant his reports had to stay up for 3 a.m. conference calls.
Yahoo, which has already laid off hundreds of workers in the past year, hasn't yet planned any cuts in relation to the search deal. But when it announced the partnership, it estimated that it would save $425 million in cash operating expenses. Of that, "the biggest element would be savings in head count, facilities, and other general and administrative" costs, says Yahoo spokesman Denis Roy. An additional $200 million would be cut from capital costs—which include servers and other large, tech-related investments.
The deal with Microsoft, Broady says, "signals a more pragmatic point of view."