Editor’s Note: This article was corrected to say that Yahoo rose to prominence in the 1990s.
Yahoo! Inc. (NASDAQ:YHOO) has confirmed what we’ve known was coming for a few days now. Yahoo’s core business is going to be gobbled up by Verizon Communications Inc. (NYSE:VZ) in a $4.8 billion cash deal, starting the next chapter after years of decline for the aging Internet company.
Yahoo’s fall and its pending sale does do investors a service, however, illustrating some very important points for anyone who invests in tech stocks. These are lessons that have been repeatedly borne out since the first computers were installed in the late 1940s, and that remain true today.
#1: There’s No Prize for Second Place
Technology markets are winner-take-all. This has been true since the 1950s, when International Business Machines Corp. (NYSE:IBM) quickly came to dominate mainframes and the “Bunch” — Burroughs, Univac, NCR Corporation (NYSE:NCR), Control Data, Honeywell International Inc. (NYSE:HON) — fought for crumbs in its wake.
The same thing happened in microprocessors, where Intel Corporation (NASDAQ:INTC) dominated for years; in PC software, where Microsoft Corporation (NASDAQ:MSFT) dominated for years; and it continues in areas like social, where Facebook Inc (NASDAQ:FB) is unassailable.
Marissa Mayer would have never gotten her chance to become CEO had “Chief Yahoo” Jerry Yang not put $1 billion of Yahoo’s money into another winner, China’s Alibaba Group Holding Ltd. (NYSE:BABA). The company’s stake in that Chinese business distributor came to be worth many times more than Yahoo itself, and Yahoo will still exist as an investment vehicle once the Verizon sale is completed.
#2: Wall Street Does Not Understand Tech
Technologists should never listen to Wall Street.
Yahoo rose to prominence in the late 1990s as a search engine, but Wall Street “experts” insisted the company’s future should lie in extending that lead into media, becoming what was called a “portal.” They wanted it to run newspapers, magazines, TV and radio — businesses Wall Street understood. I myself once wrote for a magazine called NetGuide, which billed itself as a “TV Guide for the Web.” Netguide ceased publication in 1997.
Yahoo wasted tens of billions of dollars trying to extend its reach into areas where people created content. It bought companies like GeoCities and Mark Cuban’s Broadcast.com for billions of dollars in stock. In doing this, YHOO became vulnerable to another company that did indeed focus on search — the company now known as Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL). Had Yahoo ignored Wall Street and focused exclusively on search technology, we may have never heard of Larry Page.
#3: Software Scales. People Do Not.
Another important lesson of Yahoo’s fall is that on the Internet, computers rule. Software can scale where people cannot.
It’s fine for people to create content, but that’s not where the profit lies. Once software is written, it can be deployed everywhere, all at once, and it can immediately generate huge profits.
Once content is written it must be re-written, because people are fickle. The useful life of this story may be measured in days, that of a software program in months or years.
#4: Know When to Fold ‘Em
There is one more important lesson in Yahoo that investors need to know, which is don’t fall in love with your investments and know when to sell.
Back in 2008, Microsoft offered to buy YHOO stock for $31 per share, which at that time came to $44.6 billion. This included the stake in Alibaba, as well as in Yahoo Japan. Yahoo rejected the offer as too low. Verizon is coming in at one-tenth that figure, and even with the Alibaba stake included, Yahoo’s market cap today is under $38 billion.
When someone offers you more than you’re worth, take it. Cuban knew that when he sold Broadcast.com, his Internet radio company, to Yahoo in 1999 for $5.7 billion. Cuban then sold his Yahoo stake for even more and remains a billionaire, and celebrity, to this day. Broadcast.com disappeared and is now part of Yahoo’s radio operation.
In its 20-year life, Yahoo did some very amazing things. It was the first big Internet content company, having been dubbed Yet Another Hierarchical Official Oracle by co-founders Yang and David Filo, and run first as a Web index. It helped develop cloud computing. It was where Doug Cutting was working when he wrote Hadoop, the analytics engine that is at the heart of so many cloud applications. It also created a host of Internet billionaires, including Cuban.
Yahoo was many things, but it will be no more. What’s left of YHOO is a media and advertising company that will disappear under Verizon and be run, essentially, by a team centered on an even older company, AOL. Its name will vanish into history.
Your kids will ask, “What was a Yahoo?” And your grandchildren will associate the word, once again, with Gulliver’s Travels.