Yahoo!-ligans of the Web
Outside his barren, glamourless Mountain View, CA office, shoeless David Filo's tailpipe hangs from his guano-encrusted, rust-spotted, dented 1981 Datsun 310, putty-sealed windshield, ripped upholstery, bent antenna and all. "Yeah, I do need to get the thing fixed," the 29-year-old Filo admits. "But there is just no time." Partner and onetime Stanford engineering school classmate Jerry Yang, 27, rushes through the front door and fixes mischievous eyes on his partner. "Sorry I'm late," Yang deadpans as Filo's lips break into a slight smile, "but I like to go home at night and sleep in my own bed." Filo lets loose a sheepish chuckle. At least he's on time for the 8 am interview, even if his hair's tousled from spending the night blanketless on the carpeted floor near his desk. "It was easier than going home," he reasons, though his small apartment is just a few blocks away. "Besides, my girlfriend is out of town."Filo's sleeping habits are not surprising considering that he and the Taiwan-born Yang, who grew up in San Jose's Berryessa suburb, are at the epicenter of one of the biggest battles the high-tech world has seen since the first wave of personal computer makers duked it out in the late 1970s and early 1980s. At stake is global leadership in the Internet directory market, an industry that did not even exist two years ago. However, if market prognosticators are correct, Internet-related commerce could grow to a more than $100-billion market over the next two decades, with Internet directories like the one created by Yang and Filo serving as the point of first contact. The winners will become the online equivalent of IBM, Apple and Silicon Graphics. The losers will take their place as asterisks in the electronic industry history book, alongside once-venerable names like Kaypro and Osborne. "It's a real fight," Filo agrees. The two Yahoo! founders don't have to be in this battle at all; they could have already strolled away from the high-stress online battleground as big and early winners, with millions of dollars in the bank and reputations as technical wunderkinds. All they had to do was accept any one of a number of recent offers, from behemoths like America Online or Netscape Communications, that would have rewarded their less than two years of labor with cash hoards sufficient to retire comfortably before either of them hits the age of 30. Although the Yahoo! founders won't confirm specific numbers, sources close to the company place the early takeover offers in a range that would have netted Yang and Filo more than $3 million apiece. Instead, the two opted not to walk away and live on a tropical isle. "We're not in this for the fast money," Filo, who hails from Wisconsin and Louisiana, explained in his office the morning after spurned suitor Netscape went public and the stock he and his partner had been offered appreciated fourfold virtually overnight. "Really, what we want," Filo grimaced a few hours after watching the $3 million dollars in rejected Netscape stock reach the $12 million mark, "is to be part of this industry. And besides," he guessed correctly, "that [Netscape] stock price can't possibly hold." Which of course it didn't; it went up even further.That difficult decision -- to remain independent and not succumb to the affections of suitors who hoped to lure them with fat cash offers -- is about to pay off in a very big way. Any day now, the company plans to sell stock to the public for the first time in an initial public offering handled by Goldman, Sachs & Company. When that happens, Yang's and Filo's shares in Yahoo!, 17.3 percent each, are expected to be worth as much as $60 million apiece. A pretty handsome reward for two talented and gutsy guys who, just months ago, spent most of their time trying to figure out new ways to avoid graduating."I was terribly bored," Filo recalls, as he discusses the outline of his still-unfinished graduate thesis, which entailed laborious tweaking of design schemes for the automated production of computer chips. To fight the boredom of their respective studies, Filo and Yang began surfing the then-nascent World Wide Web. "Really, we'd do anything to keep from working on our theses," Yang adds. The students figured one good way to burn time would be to compile a computerized list, initially for their own use but later shared with fellow students, of their favorite online destinations. "And then, a funny thing happened," Yang smiles. Without any advertising, the number of digital visitors accessing their Stanford University engineering-department student workstation doubled in the first month and kept right on doubling every month thereafter. Finally, Stanford administrators became fed up. "They told us we were crashing their system and that we'd have to move the thing off campus," Yang recalls. Not surprisingly, the partners quickly found a venture capitalist who sensed commercial value in an online enterprise that was already attracting a million visitors each week. The students dropped out of school, accepted an initial $1 million investment from Sand Hill Road's Sequoia Capital, spurned the early takeover offers, and set on the path to become titans of the new media industry.In doing so, they reconfirmed the Silicon Valley myth and proved that, despite a decade in hibernation, the magic is still alive. Throwbacks to the era in Silicon Valley's PC revolution when quick-thinking kids in blue jeans stumbled into millions while just trying to have some high-tech fun, Filo says he and Yang were looking for a good time when they accidentally created Yahoo!, which most industry sources now agree is the most recognized online directory brand name on the Internet's World Wide Web. "It was the real early days of the Net," Filo recalls. "We'd wander around the Net and find something interesting, and then I'd ask Jerry, ÔHey, where was that cool page we saw the other day,' and we could never remember where it was. I mean, it could take us hours to just get back there, to find it. So we made ourselves a hot list, mostly to keep track of little databases and categories." To accommodate the requests of a few friends in the engineering department, Yang agreed to make the list available in HTTP format on his student workstation, which allowed Internet users to log on to Yang's page and then jump to any of the places hotlinked on his list. "This was in the very early days of hypertext links," Yang recalls, and, at first, the few visitors to Yang's unadvertised online directory were mostly people the two students knew personally. "It was a really gradual thing, but we'd find ourselves spending more and more time on it. It was getting to be a burden," Yang relates. By March or April of 1995 -- the two can't remember exactly when -- the partners decided the time had come to explore the idea of turning their hobby into a business. The Stanford engineering department was eager to reclaim its overtaxed bandwidth and opportunity was clearly knocking. As it turned out, Yang had a friend who was finishing up at Harvard, and for one of his projects he had to write a business plan. So during his breaks from school, he spent some time putting together a plan for Yang and Filo. "Actually," Yang notes, "we were doing him a favor: he needed a real idea to work with." Although the plan was never actually circulated to investors, the exercise did help the partners think through their next moves. And it landed the plan's author, Tim Brady, a job at Yahoo! "It seemed like a natural move. He had all these ideas about marketing our product so we made him director of marketing," Yang says.Mike Moritz sounds almost giddy as his voice crackles over his car phone between horn blasts. "It was a suicide impulse on our part," Moritz jokes about his firm's sizable bet on Yahoo! "Really, we saw it as a public service to rescue those guys from Ph.D land," he continues like a comic on a roll, conceding that his rescue plan is not currently available to all struggling academics. The Yahoo! partners first came across Moritz while shopping around for a new home for their directory. Randy Adams, an early Internet commercial pioneer and Yahoo! fan who runs the Internet Shopping Network, introduced the Stanford students to the venture capitalist, whose Menlo Park firm, Sequoia Capital, has provided early financing for many leading Silicon Valley companies, including Cisco Systems, Apple Computer, Oracle and LSI Logic. Just weeks after meeting Yang and Filo, Moritz agreed to ante up Yahoo!'s first million in working cash in exchange for a minority slice of the business. That act of public service, as Moritz jestfully describes it, stands to net Moritz's venture capital firm a tidy paper profit well in excess of $40 million as a result of the pending IPO. "Yahoo! occupies a very strategic place on the Internet," Moritz adds, "and we see the Internet as the place that will eventually translate paper into bits and bytes." In addition to the cash, Moritz also put Sequoia's respected team of high-tech business experts to work in support of the fledgling entrepreneurs as would-be buyers and partners descended on the company like mosquitoes at a picnic."We talked with all of them. America Online offered to buy us outright and there were several other offers," Yang recalls. In October of last year, the San Francisco Chronicle even ran a story, headlined "America Online Eyes Internet Directory," that all but predicted an eventual sale despite the fact that Filo and Yang had already rejected the offer. Since the Chronicle's erroneous report of an impending sale, the San Francisco paper, led by business columnist Herb Greenberg, has kept up a steady, almost weekly, flow of skeptical stories about Yahoo!'s prospects, including a recent jab at the company that featured a series of e-mailed reviews from anonymous readers touting the supposed superiority of services offered by Yahoo!'s growing legion of competitors. But neither Yang nor Filo will be drawn into a shouting match with Greenberg. "It's not the first time I've seen something printed that was wrong," Yang says simply, referring to the Chron's report of the nonexistent sale to America Online. In the end, however, Filo notes, "there was no bidding war. We liked the deal with Sequoia. For us, the most important thing was that we could hold onto it [Yahoo!]. We really weren't into this for the money or for the fast payoff," Filo maintains. "There is a great tradition of people around here starting companies and then sticking around long enough to grow them," he adds. "That's what we are after. We hope to be around for a long time."The pair has already withstood some challenges that others thought would surely sink them. For example, late last year Netscape Communications, which makes the Netscape Navigator and once housed Yahoo!'s server on its Internet link, bounced Yahoo! from the top slot on its directory page and replaced it with a link to a competitor, which paid top dollar for the space. It seemed like Yahoo! might lose its position as the dominant Web directory; Yahoo! was, critics said, a classic flash in the pan. The Stanford kids, even with their million dollars in working capital, could never withstand the assault of at least a half-dozen competitors with bigger computers, better funding and the backing of huge corporations.Although they restrained themselves from making public attacks on Netscape during the ordeal, the Yahoo! founders were clearly taken aback by Netscape's mercenary move. Industry insiders pointed out, for example, that Yahoo!'s directory had contributed enormously to helping make the World Wide Web and the Netscape browser so popular in the first place. Without Yahoo's list of destinations, for example, early users of Netscape's browser would have found little to browse. In typical fashion, however, Yang and Filo did not give up or give in.Instead, they maintained a close working relationship with the Netscape business development team, pushing hard to get Netscape's leaders to reconsider their strategy of hooking up with just one featured top-bidding directory. "We're just going to concentrate on what we've always done," Yang insisted the week after Netscape dropped the Yahoo! link, "which is to create the best possible online directory, adding content and other features along the way when it makes sense."I'm pretty optimistic that we'll find a way to work with Netscape again," he added, noting that "it does take some money to maintain a good directory," and contending that the entire industry could be killed in its crib if Netscape's new fees make it too tough for directory services to earn profits.Meanwhile, the two partners watched -- nervously at first, and then with great relief -- as traffic to the Yahoo! site dropped off by a small percentage during the week following the Netscape demotion late last year, but quickly bounced back to its previous level and then resumed its upward trajectory, now averaging more than 12 million user hits per day. And last month, the informal discussions with Netscape paid off with the announcement that Netscape is changing its procedures and will soon include several leading directories, each of whom will pay Netscape $5 million apiece, rather than sell a single featured directory location to one company for top dollar.The strategy is a classic win-win, say officials at both Netscape and Yahoo!, since it promises to spur the growth of several companies at the same time, rather than push most of the directory companies into an online backwater while simultaneously loading up one "winner" with expenses that are so high financial success becomes problematic. "We'll be working with Netscape again," Yang vowed even during the worst days of the Netscape affair. "They are good people," he maintained stubbornly in a phone interview during his upstart company's worst week, "and they understand the importance of building a strong industry," he said, forecasting the more welcome developments that did occur some months later.One major advantage enjoyed by Yahoo!, the founders note, is the goofy but memorable name. "It is a pretty recognizable brand name," Yang says about Yahoo! " Originally, it was Jerry's Guide to the World Wide Web," Yang laughs, "but we settled on Yahoo," a word they came up with while lampooning the digitalese of the other hierarchically organized lists they'd been looking at. "This is ÔYet Another Hierarchically Organized" list," Yang explains. "I was not crazy about the name at first," Filo adds, "but it grew on me." Now, he says, he is grateful the partners selected a name that is "so memorable and that conveys the sense of fun involved in all this, the sense of adventure. That is what really distinguishes our site. It is a place for adventures. A place to discover things," he says.Fortunately, Yang notes, the Netscape blackout was not as bad as it could have been since many Yahoo! users had already apparently set their own browser bookmarks before the Netscape jilting, explaining why user visits held steady.Even so, Yang and Filo have no shortage of competitors. Several contenders, such as the McKinley online directory, are trying to outpace Yahoo! by adding features, like reviews of Web sites, in addition to noting their locations. These more meaty offerings have already attracted the attention of several key Internet service providers (ISPs), including San JoseÐbased Netcom, the largest ISP in the country. In fact, around the time Netscape jettisoned Yahoo!, the directory was also bounced from the Netcom homepage. "Netcom has made a significant investment in McKinley," Yang notes about Netcom's approximately 15 percent stake in the Yahoo! competitor, "and besides, there was never an agreement [between Yahoo! and Netcom] to stick us on there. They just did it and then they took us off. We wish them well," Yang adds diplomatically, noting that visits to Yahoo! from Netcom users, like those coming from the Netscape home page, also have continued to grow.The competition, though, does provide ammunition for Yahoo!'s detractors. "The way people are talking about Yahoo! is absolutely ludicrous," charged McCabe Capital Partners fund manager Steve Zenker in one of the Examiner's more recent unflattering articles about Yahoo! "The competition is way too fierce," Zenker said; "they could be obsolete in two months," he claimed, explaining why his fund is not investing in the company. Similarly, just a few weeks earlier, the Chron ran another disdainful story, headlined "If You Think Yahoo! is Breathtaking, You Haven't Seen Excite," that strongly cautioned investors over the dangers of buying both the Yahoo! legend and company's stock.In fact, as Yang and Filo freely admit, a case can be made for many of the competitive online Internet directory services. Unlike Yahoo!, for example, the McKinley directory offers reviews of the Web sites it catalogs, not just lists, which do seem to make it a more comprehensive online utility. However, Yang contends that the review feature, which he admits is "nice," is impractical over the long haul."Okay, just think about it for a moment," he says, mousing his way between competitor directories on the workstation in the conference room of the Yahoo! headquarters. "I mean, just look at this. Web sites change all the time; this one is not the same as it was yesterday. So how often are they going to review their reviews? Will those reviews really be current and meaningful? I mean, with a few thousand sites it might be practical. But with 100,000 sites? How many sites can one reviewer review in one day? I mean, it would take an army. We get a thousand requests each day to have sites added to our list. I think in this business you really have to prepare for the scale involved. And if the business model won't scale up, then in the end it won't work," he says.Similarly, Yang scoffs at an even more powerful challenge being mounted by Silicon Valley's old mainframe stalwart, Digital Equipment Corporation, which bills its Altavista search engine as the most powerful search engine and directory on the Web. At DEC, where the company motto is, "whatever it takes," strategists have thrown the company's sizable computing power at the task by using robot computers, sometimes called spiders, to index every bit of information they can find on the Web so that content, as well as Web page titles, can be searched for key words."It is pretty amazing," Yang concedes about the technical arsenal DEC has unleashed on the task, "but again, have you tried it? Already, you get back a lot of stuff you don't want. And that is with the current size of the Web. What about in five years, ten years? Are people really going to want to search through all of that to find what they want? And how many computers will they need to archive everything when there is 100 times, 1,000 times, more material on the Web?" Confirming Yang's surmise, DEC officials conceded last week that they were already experiencing a "temporary" problem with Altavista due to insufficient available disk space."Really," Yang says, catching himself, "I don't want to say anything bad about those companies. In fact," he quickly adds, reverting back to the we're-in-this-together ethic that is already fading elsewhere in the industry, "we have pointers to many of those other directories right on our page. I think there is room for several kinds of businesses when it comes to searching the Internet," Yang offers, noting that the other services don't have to fail for Yahoo! to succeed. "But Yahoo!'s appeal is a little different," he says. "We've designed this for people who like to explore the Net, for people who know what they want but also for people who want to know what is there. And we've built it to last."With their IPO now imminent, Yang and Filo, each of whom is listed in Security and Exchange Commission filings as "Chief Yahoo," are clearly pleased they stuck to their guns. "It will take at least another two years, I think, for things to shake out," Yang says. "We didn't want to hook up with an Internet company, make a deal, and then find out we've made a deal with a company that can't survive. Eventually, some things will get sorted out. But who will be the big Internet access provider two years from now? AOL? Netcom? The phone companies? It's just too early to tell. It'd be great if we could pick the winner. But we might pick the loser, if we try." In the meantime, Yang notes, Yahoo! is already a profitable business, taking in more than $300,000 in advertising revenue each month, with more than 80 major advertisers, including Bank of America, American Express, Anheuser-Busch and Honda.The fast growth in ad revenues surprised both Yang and Filo, who vowed to maintain a separation between the service's editorial function and its advertising sales last May when they spoke to a session organized by the nonprofit industry group Smart Valley. "I'm sure we're going to face issues when we start taking advertising," Yang predicted, responding to a question about whether Yahoo! would allow advertisers to influence the structure of the directory or the prominence of listings. "We plan to maintain control over that," he pledged. Since creating their editorial and advertising strategy, which the founders say is modeled more after The New York Times than the Yellow Pages, the rush of new advertisers has left Yang and Filo free to think about other things."We've already done better than all our projections," Yang says, referring to the steady ad growth and the recent $63.75 million investment made in the company by Japanese publishing giant Softbank and Ziff-Davis Publishing (which Softbank just acquired). Like the earlier investment from Open Text Corporation, which offers a search engine similar to Altavista that is linked to the Yahoo! page, these partners were selected for their media savvy and staying power. "Our major partners are not Internet companies," Yang notes. "We don't want to be gobbled up or pick a loser. So we went looking for companies that were interested in this market and who wanted to grow with us."Yang and Filo plan to roll out several new products this year, including a print and online magazine, localized versions of their service, such as Yahoo! Japan, and a specialized offering focused on computing topics. Last month, the company introduced Yahooligans!, an Internet navigational guide aimed at children from ages 8 to 14.In the interim, while they wait to join legends like Jobs and Wozniak, Hewlett and Packard and Clark and Andreeson, Yang and Filo are still paying themselves salaries of about $50,000 per year. Yang, feeling frisky, has already splurged on a new Isuzu Rodeo sport utility vehicle, although his partner still tools around in the dilapidated old Datsun with its muffler occasionally kicking the ground like a sparkler on a warm summer day."I feel pretty lucky," Filo says, despite his automotive handicap. "I mean I work all day and sometimes all night," he concedes, "but I like the people I work with and I'm doing exactly what I want to be doing."