Episode 33 Overture (with the Internet History Podcast!)

Summary Notes


In episode 33 of Acquired, hosts Ben Gilbert and David Rosenthal, joined by guest Brian McCullough from the Internet History Podcast, delve into Yahoo's pivotal 2003 acquisition of Overture, a company that revolutionized online advertising with its pay-per-click model. The episode unpacks the complexities of the deal, Yahoo's strategic missteps in integrating Overture's technology, and the broader implications for the tech industry. Despite Overture's early success in monetizing search results, Yahoo struggled to compete with Google's superior technology and engineering culture. The acquisition, while intended to catapult Yahoo into search engine dominance, ultimately highlighted the challenges of marrying disparate corporate cultures and technologies in a rapidly evolving digital landscape.

Summary Notes

Cancellation of Podcast Episodes

  • Sometimes episodes are canceled mid-recording due to irrecoverable issues.
  • Brian McCullough shares an incident where an episode with the MP3 inventor was problematic but still released.

"Yes. Actually, the one that was the worst that I still released was, ironically enough, the, the guy that invented the m p three."

The quote indicates that despite facing significant issues during the recording of a particular episode, Brian chose to release it, highlighting a commitment to delivering content to listeners even under challenging circumstances.

Introduction to Acquired Podcast Episode 33

  • Hosts Ben Gilbert and David Rosenthal introduce the episode and guest Brian McCullough from the Internet History Podcast.
  • The episode will discuss Yahoo's acquisition of Overture in 2003.
  • A crossover episode that will also be featured on Brian's podcast.

"Welcome back to episode 33 of acquired, the show about technology acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal and we are your hosts today."

The quote introduces the episode and its hosts, setting the stage for the discussion about a significant acquisition in the tech industry.

Pilot as a Sponsor

  • Pilot is a sponsor for the episode, providing accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is now a billion-dollar company with notable backers.
  • The service aligns with the philosophy of focusing on core business strengths and outsourcing non-core functions like accounting.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds."

The quote highlights Pilot's role as a sponsor and its relevance to startups and growth companies, emphasizing its growth and success in the accounting services industry.

Yahoo's Acquisition of Goto.com/Overture

  • Goto.com, later known as Overture, originated from Idealab, an incubator.
  • Goto.com was a search engine where search results were based on advertiser bids rather than relevance.
  • The model was successful but controversial due to its departure from traditional search algorithms.

"Yahoo acquiring Goto.com, which at the time of acquisition was known as Overture.com."

This quote sets up the central topic of the episode: Yahoo's acquisition of Goto.com/Overture, which is a key event in the history of online advertising and search engines.

Overture's Business Model and Impact

  • Overture's pay-to-play model where advertisers bid for search result placement was innovative but reliant on partnerships with larger traffic sites.
  • The model was successful, especially as the dot-com bubble burst and companies like Yahoo needed alternative revenue streams.
  • Overture's syndication of its ad model to major search portals was a strategic move that led to significant success.

"The incubator we're talking about was called Idealab, which was created by a, founded by a man, probably most of you know, by the name of Bill Gross."

The quote introduces Bill Gross and Idealab, the incubator behind Goto.com/Overture, and underscores the innovative nature of the business model that disrupted traditional search engine practices.

Google's Entry and Innovation in Paid Search

  • Google initially lacked a revenue model and experimented with licensing search results.
  • Observing Overture's success, Google adopted and improved the paid search model.
  • Google automated ad approvals, targeted small advertisers, and introduced quality-based ad ranking to optimize relevance and revenue.

"So Google does, what is the obvious thing in retrospect, and probably even at the time, they say, hey, maybe let's give this overture model a try."

This quote explains Google's strategic decision to adopt a paid search model similar to Overture's, acknowledging the success of Overture's approach and setting the stage for Google's subsequent innovations in the space.

Yahoo's Acquisition Strategy and Negotiation with Overture

  • Yahoo acquired Overture for $1.4 billion, which was less than Overture's asking price.
  • Overture's reliance on partnerships made it vulnerable, giving Yahoo leverage in negotiations.
  • The acquisition allowed Yahoo to secure a critical revenue source and take control of the paid search model.

"So in mid 2003, negotiations with Overture Bear fruit and Yahoo. Agrees to buy overture for $1.4 billion, which was actually 25% less than overture was asking for."

The quote details the acquisition deal between Yahoo and Overture, highlighting the negotiation dynamics and the strategic importance of the acquisition for Yahoo's business model.

Google's Ad Model and Market Efficiency

  • Google's model increased ad relevance, leading to more clicks and higher revenue.
  • Introducing the innovation of lowering the bid price to just above the second highest bidder increased market efficiency.
  • This pricing model encouraged advertisers to join Google's AdWords from Overture.
  • The change to cost per click and the quality score was introduced in February 2002.

"And we'll see that come back later."

This quote implies that the innovations Google introduced in ad pricing and relevance would have a significant impact on the market later on.

"Google actually is able to make more money by this model because by making it more relevant, if you do the math... they're getting more money from the ads that are clicked on the most."

This quote explains how Google's ad model, which prioritizes relevance, results in more clicks and thus more revenue for Google.

"That starts to feel like Google being a real enduring company, right? Making these decisions that really bring the marketplace efficiency in line with where the market actually is..."

This quote reflects on Google's strategic decisions that align with market efficiency and long-term advertiser relationships, indicating a shift towards becoming a sustainable company.

Yahoo's Relationship with Google and Overture

  • Yahoo was never technically a search engine but a directory.
  • Yahoo's primary revenue came from banner ads, especially from .com companies.
  • Google provided search results for Yahoo since 2002.
  • Yahoo noticed the success of Overture and Google's ad syndication and considered entering the search market.
  • Yahoo's acquisitions of Inktomi and Overture aimed to replicate Google's successful model.

"Google had been, since 2002 providing the search results for Yahoo."

This quote highlights the preexisting relationship between Yahoo and Google, with Google powering Yahoo's search results.

"Yahoo starts to get the idea of maybe it itself needs to get into the search game."

This quote shows Yahoo's realization of the potential in the search market, influenced by Google's and Overture's success.

"The first thing that Yahoo purchases is inktomy... and then on top of that, they turn around and pay the 1.4 billion for the search ad pioneer overture."

This quote outlines Yahoo's strategic acquisitions to strengthen its position in the search market and advertising.

Cultural and Technical Challenges in Yahoo's Acquisitions

  • Integrating Overture's search ads business with Yahoo's existing model was difficult.
  • The cultural clash and technical integration issues hindered the success of the acquisitions.
  • Project Panama was Yahoo's attempt to create an automated ad system like Google's AdWords but faced delays.
  • Yahoo's inability to quickly adapt and integrate led to Google gaining a significant lead in the search market.

"It was a huge, on some level technical headache to integrate the overture business into Yahoo."

This quote describes the technical challenges Yahoo faced in integrating Overture's business into its own operations.

"It was a cultural headache, a cultural clash of trying to change Yahoo's business model, basically midstream."

This quote emphasizes the cultural difficulties Yahoo encountered while trying to shift its business model to align with Overture's.

Yahoo's Attempt to Replicate Google's Success

  • Yahoo's acquisition of Overture was intended to emulate Google's ad model.
  • The delay in launching Project Panama allowed Google to solidify its market dominance.
  • Yahoo's late entry into the adwords-based search market resulted in it becoming an also-ran compared to Google.
  • Yahoo's sale of Google stock post-IPO boosted its bottom line but did not compensate for the missed opportunity in search.

"So why can't Yahoo just go ahead, buy Overture, buy another company, get into the search game, and basically replicate the business model that Google is having success with, that it has copied from overture."

This quote illustrates Yahoo's rationale for acquiring Overture in hopes of replicating Google's successful ad model.

"By the time that Yahoo finally realizes its dream of building adwords based off the acquisition of overture and inktomy, it's too late."

This quote signifies the missed timing and opportunity for Yahoo, which resulted in Google taking the lead in the search market.

The Irony of Patent Litigation

  • Overture sued Google for IP infringement before being acquired by Yahoo.
  • Yahoo settled with Google, receiving pre-IPO Google stock, which later sold for nearly a billion dollars.
  • The settlement and Yahoo's reliance on Google stock indicate the complexity of the legal battle and Yahoo's strategic decisions.

"Yahoo gets, and we were talking about this over email, the numbers we're not sure about, I believe something like $400 million of Google stock, pre IPO Google stock."

This quote reveals the settlement between Yahoo and Google, where Yahoo received a significant amount of Google stock, which proved to be financially beneficial.

"The real patents would have been worth billions."

This quote from Bill Gross suggests that Overture may not have secured the most valuable patents, potentially affecting the strength of their legal case against Google.

Acquisition Categories and Strategic Decisions

  • Yahoo's acquisition of Overture was categorized as both a technology and a business line acquisition.
  • The challenge was balancing the integration of technology with maintaining the business line serving multiple customers.
  • Yahoo's hesitation to fully commit to a single strategic direction with the acquisition led to a loss of potential value.

"They had the technology that they were integrating into Project Panama, but they also had this business line and overture continued to serve other customers."

This quote discusses the dual nature of Yahoo's acquisition of Overture and the strategic confusion it caused.

"You got to pick one and you got to go hard at a strategy."

This quote suggests the need for a clear and committed strategic direction when making an acquisition, which Yahoo failed to execute effectively.

Yahoo's Attempted Technology Acquisition

  • Yahoo's acquisition was an attempt to obtain technology, specifically search technology.
  • Yahoo's technology was inferior to Google's, being orders of magnitude less powerful.
  • The acquisition is characterized as aspirational, with Yahoo trying to emulate Google's success in search.
  • Yahoo's failure was partly due to not recognizing the potential profitability of search.

"For me, this is clearly an attempted technology acquisition." "It's an aspirational acquisition because in the same way that Google had looked across at overture and said, hey, there's gold in them there hills, Yahoo has looked over at Google and said, there's gold in them there hills."

These quotes highlight Yahoo's intent behind the acquisition, which was to improve their technology in the search domain, an area where Google had already established dominance. The acquisition was driven by the desire to compete with Google and capitalize on the lucrative search market.

The Evolution of Yahoo's Business Strategy

  • Yahoo transitioned from a web directory to a media organization, underestimating the value of search.
  • Google's innovations in search technology and business models were unforeseen by Yahoo and other companies.
  • Yahoo's late pivot to search was an attempt to catch up with Google's lucrative ad business.

"We completely forget that it was not apparent that a marketplace for search ads was going to be an incredibly lucrative business."

This quote reflects on the hindsight bias regarding the profitability of search ads. At the time, Yahoo did not realize the potential of search and instead focused on banner ads, which later proved to be a less successful strategy compared to Google's search ads.

The Impact of Google's Innovations on the Industry

  • Google's innovations in search and ad technology set new standards for the industry.
  • Hadoop, an open-source project funded by Yahoo, was pivotal in enabling big data processing for various tech giants.
  • Google's engineering culture and publication of research papers spurred open-source projects that lagged behind Google’s internal tools by years.

"Hadoop that really then enables Facebook to do all of the data work that they do to create the newsfeed, that enables when you order an Uber for it to get matched to a driver who's two minutes away, that enables, when you search on Airbnb for you to find the best property."

This quote illustrates the significance of Hadoop, which emerged from Yahoo's efforts to compete with Google. Hadoop became a foundational technology for many companies, enabling them to manage large datasets effectively.

The Role of Engineering and Technology in Search Dominance

  • Yahoo's non-engineering centric culture was a disadvantage against Google's tech-focused approach.
  • The need for excellent engineering and technology was critical to win in the search industry.

"The ultimate point of PG's post that Brian sent to us is that Yahoo wasn't an engineering centric culture and Google was. And that to win its search, you needed to have really excellent engineering and technology."

This quote emphasizes the importance of an engineering-centric culture in the success of a search company. Google's focus on engineering was a key factor in its dominance over Yahoo in the search market.

Counterfactuals and the Importance of Competitive Advantages

  • Speculations on what would have happened if Yahoo had not attempted to compete with Google in search.
  • The discussion includes the potential impact on the display ad business and the mobile advertising paradigm.
  • The importance of defensible competitive advantages in the tech industry is highlighted.

"What if instead of double click being purchased by Google, Yahoo doubles down on display and it purchases double click?"

This counterfactual scenario suggests an alternative path for Yahoo, focusing on display advertising rather than competing directly with Google in search. It raises questions about strategic focus and the potential outcomes of different business decisions.

The Sustainability of Platform Businesses

  • Overture's position as a neutral ad platform was unsustainable without owning a platform.
  • The challenges of maintaining partnerships and pricing power in a platform business are discussed.

"Without a platform of its own, it was never sustainable in the end."

This quote addresses the inherent instability of Overture's business model, which relied on partnerships without having a proprietary platform, ultimately leading to its inability to sustain its position in the market.

The Acquisition's Legacy and Lessons Learned

  • The acquisition and the events around it shaped the future of major tech platforms.
  • The importance of recognizing and capitalizing on technological innovations is underscored.
  • Google's approach to open-source contributions and its impact on the wider tech ecosystem is discussed.

"This really was a crossroads of history. I mean, the amount of things that both happened and didn't happen because of this really shaped every major platform that's emerged ever."

This quote captures the historical significance of Yahoo's acquisition attempts and the broader context of the tech industry's evolution. It reflects on the long-term effects of strategic decisions made by tech giants.

Consumer and Seller Perceptions on Marketplaces

  • Consumers often feel they are getting a great deal due to better prices, selection, and convenience on platforms like Amazon.
  • Sellers on marketplaces also tend to feel positive about the volume they can sell, which they might not achieve elsewhere.
  • Uber is an example where there's a perceived imbalance, with drivers not feeling like they're getting a good deal.

"And as a seller on the marketplace, I think you also feel like you're probably getting a pretty good deal in terms of the volume you're going to be able to sell versus anywhere else."

The quote highlights the positive perception of sellers on marketplaces, who appreciate the high sales volume they can achieve compared to other sales channels.

Importance of Incentive Alignment in Growth Engines

  • Incentive alignment is crucial for the growth of platforms like Google; it ensures that all parties feel they are benefiting.
  • Personal incentives drive users to invest time and resources into a platform.
  • Google is an example where both users and advertisers felt they were getting a good deal, contributing to its growth.

"For continuing to grow those things is incentive alignment. And for everybody on each side, I keep saying it, but feel like they're getting a good deal."

The quote explains that the growth of platforms is fueled by ensuring that all participants feel they have a stake in the platform's success.

Google's Early Reputation and Advertising Model

  • Google's early motto "Don't be evil" contributed to a positive reputation.
  • Introduction of ads on Google was accepted because they were relevant and unobtrusive.
  • Relevant ads contributed to the positive perception of Google, unlike other platforms where ads were intrusive.

"Google already had this reputation of, oh my God, it just works. They're the don't be evil people. And when they introduce ads to us, it doesn't feel terrible."

This quote reflects on Google's initial positive reputation and how it influenced user acceptance of their advertising model.

  • Brian McCullough shares his experience of the effectiveness of paid search advertising on platforms like Goto (later Overture) and Google AdWords.
  • The direct return on investment from paid search was significant and contributed to the growth of his first company.
  • Google AdWords was chosen over other platforms due to the perceived higher quality of traffic and customer base.

"My first startup, when I was 22, in college, I bought an ad on Goto before it was even overture. And I paid $40 and I paid $40 and got $80 back within 24 hours."

The quote describes a personal anecdote that illustrates the immediate financial benefit of paid search advertising, which was particularly effective on Google's platform.

Network Effects and Flywheels

  • Network effects and flywheels are critical concepts in understanding the growth of platforms.
  • David Rosenthal's talk on network effects and flywheels offers insights into these mechanisms.
  • The flywheel effect is illustrated by Google's cycle of attracting more customers, which brings in more advertisers, improving the search results, and continuing the cycle.

"Like more customers bring more advertisers, which gives more money to Google. And all the data generated by both further improve the search results, which bring more customers, which bring more advertisers, and."

The quote summarizes the self-reinforcing cycle of network effects, where each element of the platform enhances the others, leading to sustained growth.

Yahoo's Acquisition Strategy and Outcome

  • Yahoo's acquisition strategy, including the purchase of Overture, is discussed in terms of its long-term value and integration success.
  • There was a perceived lack of clarity and integration failure in Yahoo's approach.
  • Yahoo's desire to be a media company conflicted with the need to compete as a tech company.
  • The acquisitions did not help Yahoo compete with Google in the search market.

"And I'm going to call this a d, because while not being a total failure, this did not help Yahoo compete in what would eventually become entirely Google's market."

The quote evaluates Yahoo's acquisition strategy as largely unsuccessful in helping the company compete with Google, despite some benefits from the patents.

Impact of Yahoo's Efforts on the Tech Ecosystem

  • Yahoo's involvement in various acquisitions and projects, like Panama, indirectly contributed to the growth of the startup ecosystem.
  • Personnel and technology from Yahoo's efforts led to the creation of influential companies and technologies, such as WhatsApp and Hadoop.
  • The "PayPal mafia" effect is mentioned, highlighting the significance of interactions in Silicon Valley leading to innovation.

"WhatsApp would not have happened, I don't think, without Project Panama, because Brian Acton and, you know, they worked on Project Panama at Yahoo. That's where they met, and then they left and they started WhatsApp."

The quote emphasizes the indirect but substantial impact of Yahoo's projects on the formation of successful startups, illustrating the broader influence of Yahoo's activities on the tech industry.

Dr. James Gottman's Research on Relationships

  • Dr. James Gottman's research on couples provides insights into the dynamics of successful and failed relationships.
  • The research includes biological signs of distress even in seemingly calm relationships.
  • The overall message is that kindness is a fundamental component of love and successful relationships.

"Having a conversation sitting next to their spouse was to their bodies, like facing off with a saber toothed tiger."

This quote from Dr. Gottman's research conveys the intense biological reactions that can occur in troubled relationships, even during mundane conversations.

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