Google has pummeled Yahoo into near-obscurity: the early search leader – the Google of the 1990’s – Yahoo’s market cap is a fraction of GOOG’s while their search share is a distant second. It is easy to forget that Yahoo is actually a large and highly profitable company by most standards – over $6 billion in sales and more than $700 million in profits in 2006.

But when you’re competing against the baddest internet company around, good isn’t good enough. Which is why ex-CEO Terry Semel was shown the door and a new team, co-founder Jerry Yang and CFO Mary Decker, are now at bat.

Sclerotic decision-making
Analysts point to Yahoo’s inability to make fast decisions to acquire hot properties, like FaceBook and YouTube, as indicative of the company’s malaise. A compelling vision and crisp decisions would surely help.

Yet for all their success, the Google’s top management is hardly more experienced than Yahoo’s new team. It is the battle of the billionaire geeks.

But Yahoo has a much bigger problem than corporate culture. How about some basic blocking and tackling?

Profit = Revenue minus Cost.
Financial analysts are focused on Yahoo’s missed revenue opportunities. What about the cost side?

Bringing a knife to a gun fight
Yahoo’s infrastructure is built like a very large enterprise data center with brand name products. For example, Yahoo’s very successful mail system is run on NetApp filers. (Is it just me or does that NetApp page sound a little off?) Yahoo does use as much free software – FreeBSD, Apache and Perl – as they can, so their problem is hardware capital expense and operating expense.

Google’s infrastructure is built on commodity PC products. Cheap SATA drives velcro’d on quad-core mobo’s instead of high-performance network storage. A software layer that optimizes and manages across the cluster, so people don’t have to. No costly RAID arrays. No RAID at all, just 3x – or more – replication.

Cheaper, better, faster: pick any three
I compared Yahoo and Google IT cost structures a year ago and found that for every dollar Google and Yahoo invest in IT, Google generates 50-60% more revenue with 4,000 fewer people. Since then, I’ve estimated that Google has a 5-8x cost advantage per user I/O over Yahoo. That includes search, mail, and other services.

Google’s cost advantage gives it two huge advantages:

  • Its ROI bar is lower than competitors, so it can afford to make improvements that competitors can only dream of.
  • Its lower costs mean that even if a deep-pocketed competitor like Microsoft wanted to eliminate the profits in AdSense, they’d be bleeding red ink while Google broke even.

The low-cost producer doesn’t always win. But they sure have more maneuvering room than higher-cost producers.

So how can Yahoo win?
This isn’t rocket science.

  • Get IT costs under control. Go to a Google-like infrastructure using commodity products.
  • Defend your market leadership where you have it, like Yahoo mail. Google’s marketing is pretty much MIA – as the $1.6 billion purchase of YouTube reflected. Google is pleased with the growth of Gmail, which is largely a function of people opening multiple email accounts to take advantage of the $10 Google Checkout promotion, but Yahoo has the users.
  • Add capabilities to its new commodity-based infrastructure, such as transaction processing, that Google can’t easily add, and use it to drive new business and traffic.

The StorageMojo take
Google looks invulnerable, but their inability to win outside of search and advertising points to just how weak their management and their market position is. They don’t have the integration skills of a Cisco – look at how poor YouTube’s search function still is months after purchase by the world leader in search – and while a huge bag of money can rent a lot of love, Microsoft has proven that it can’t buy internet success.

Yahoo has an opportunity to catch the next wave of search goodness if they are aggressive about bringing their infrastructure costs down. If not, it doesn’t matter what they do on the revenue side: they will continue a long, slow decline. They’ll be good, but they’ll never be great.

Comments welcome, as always. And as an aside I’m here to report that Brad Bird’s new movie, Ratatouille is a must see – even better than The Iron Giant and The Incredibles. The animated short Lifted is hysterical. One caution: I don’t think the movie is suitable for some pre-schoolers due to disturbing images of swarming vermin. Wait for the DVD.