Is Firefox Search Worth $375M/Year to a Yahoo Buyer?

Marissa Mayer and Firefox: worth it?

Marissa Mayer and Firefox: can the marriage last? Photo of Marissa Mayer by Fortune Global Forum on Flickr.

Who stands to lose if Yahoo is sold — besides of course Marissa Mayer, who will probably lose her job along with a fair number of Yahoo staff? The surprising, and unobvious, answer is Mozilla and the Firefox browser.

That’s because Mozilla is highly dependent on a five-year contract with Yahoo, signed in December 2014, where it receives about $375m per year to make Yahoo the default search provider in the Firefox browser on the desktop. From 2004 to 2014, that contract was exclusively with Google; now it’s Yahoo in the US, Google in Europe, Yandex in Russia and Baidu in China.

How much is $375m per year compared to Mozilla’s spending? Most of it. Mozilla’s audited financials offer some useful details. They’re not as timely as a public company’s numbers; the most recent date to the end of 2014.

Mozilla’s numbers

In 2013, the Mozilla foundation recorded “royalties” (mainly, search income) of $306.1m out of total revenues of $314.1m; in 2014, 323.3m of $329.6m. Search income is about 97% of Mozilla’s total income.

It’s also clear Yahoo is paying Mozilla more than it got from Google. Marissa Mayer was reportedly so keen to secure the business, she made a preemptive bid that turned out to be far too high for the reality of a world where Firefox’s share on the desktop was falling and its position on mobile is minimal.

The question is, with Yahoo on the block, would a buyer of Yahoo want to continue with the Mozilla contract? It is a big drag on Yahoo’s spending. According to Yahoo’s financials, its Traffic Acquisition Costs (TAC) – the money it pays other companies to bring traffic to it – have rocketed.

Yahoo spending on traffic acquisition

Clearly, it’s spending a lot more both for display ads and for search. TAC can be a good thing: you pay a third-party site to bring people to you and then you make a profit by selling those people products or showing them ads.

Yahoo’s search TAC, in particular, has rocketed from a low of 0.7m in the first quarter of 2014 to $141m in the fourth quarter of 2015, just over a year after signing the deal with Mozilla.

That’s not all going to Mozilla. But digging into Yahoo’s financial statements, we can find out precisely how much it is paying.

In its annual report for 2015, Yahoo says: “Of the $350m increase in revenue and $660m increase in TAC for the year ended December 31, 2015, $394m and $375m were attributable to the agreement we entered into in November 2014 to compensate Mozilla for making us the default search provider on certain of Mozilla’s products in the United States (the “Mozilla Agreement”).”

(You might wonder: why is the increase in overall revenue smaller than the increase from Mozilla? It’s because Yahoo’s overall revenues fell.)

So Yahoo is paying $375m annually to Mozilla just to be the default search engine in Firefox on the desktop in the US. And it’s going to keep on paying. In the 3Q 15 report, it said: “The Company is obligated to make payments, which represent TAC, to its Affiliates. As of September 30, 2015, these commitments totaled $1,682 million, of which $100m will be payable in the [fourth quarter] of 2015, $401m will be payable in 2016, $400m will be payable in 2017, $375m will be payable in 2018, $375m will be payable in 2019, and $31 million will be payable thereafter.”

Given that $375m went to Mozilla in 2015, it seems likely the large part of those future sums are also bound for Mozilla.

But a future buyer might not want to stick with Mozilla because Yahoo’s TAC is beginning to get out of whack.

For comparison, Google’s TAC used to be between 23% and 25% of its ad and total revenues; more recently – since the end of the Mozilla contract – that has fallen below 20%.

As a proportion of search revenue, Yahoo’s search TAC has gone from a low of almost 1% of search revenue, to 27% in the fourth quarter of 2015. That’s bigger than Google’s TAC proportion. Yahoo’s problem is it doesn’t have the monopoly Google does and doesn’t monetise its advertising as well as Google. Google’s AdWords are a high-margin ad business. Yahoo offers display ads, which are a commodity.

The end of the search affair

So a Yahoo buyer would be very likely to look for a way to get out of the five-year Mozilla contract. How would that affect Mozilla?

Quite hard.

Mozilla’s expenses in 2013 were, mainly, $197.5m on “software development” (out of total costs of $295.4m); in 2014, that was $212.8m (of a total of $317.8m). “Software development” swallowed up about 65% of the royalty income in 2013; the same in 2014.

As Mozilla acknowledges, those “royalties” are payments from “various search engine and information providers”. What happens if one of those sources dries up?

Mozilla knows it’s at risk here. Under the “Concentrations of Risk” subheading, there’s this:

Mozilla entered into a contract with a search engine provider for royalties which expired in November 2014. In December 2014, Mozilla entered into a contract with another search engine provider for royalties which expires December 2019.

Approximately 90% of Mozilla’s royalty revenues were derived from these contracts for 2014 and 2013 with receivables from these contracts representing approximately 77% and 66% of the December 31, 2014 and 2013 outstanding receivables, respectively.

Yahoo, as we can see, is paying about $400m per year just for US search. How much did Google pay? In 2011, when it re-signed for three years, the estimate was that Google was paying just over $100m per year – for a worldwide deal. It seems likely the real figure was higher. But Mozilla relied on it. And the Yahoo money is even more needed as Mozilla tries to recover from the dead-end of Firefox OS on mobile.

Pulling the plug

Basically, if a new Yahoo owner pulls the plug on the search deal, Mozilla will have to seek a new contract in the US. But who’s going to be willing to step up? Microsoft, probably; but the price that Mozilla will be able to demand will be much lower than it got from Yahoo. Unless, of course, Google decides to step back in and push the bidding up. But its actions around the last auction suggest it wouldn’t be interested; Chrome is too dominant, and Firefox is dwindling.

So the next few weeks aren’t going to be tense just for Yahoo. There’s a whole team of software engineers working on Firefox and other products who will have to wonder about their future if Yahoo has a new owner.

Is Yahoo Even Worth Trying To Save?

Is there any reason to save Yahoo? I say no. 

What does Yahoo do? What is Yahoo for? What is Yahoo great at? What is Yahoo even good at? 

Yahoo does not have the best technology, nor the best content. Yahoo does not have the best users, nor the most. Yahoo is close to irrelevant on mobile — the future of computing — and has flubbed every effort to be social.

Yahoo is the Detroit of web properties. Once big, once thriving, it helped create a future it can never be part of. It’s only hope, in my view, is to whither away, quickly, so maybe a few worthy pieces can find life in the wild.

While the tech blogosphere was in a tizzy last week, some outraged, most envious over the firing and massive golden parachute that Yahoo’s Henrique de Castro received, they missed the larger story: de Castro was not the “dead man walking.”  Yahoo is the dead man walking. Gleeful rubbernecking by industry watchers won’t change the company’s fortunes.

Outraged that Yahoo dropped so much on an executive who failed at his job? Surprised that Yahoo paid so much for Tumblr? The desperate always pay too much. de Castro and Tumblr’s David Karp are, I suspect, only the first of many scavengers who will feast on Yahoo’s bones.  Indeed, there may be no better purpose for this company, sadly, than for the fortunate pleasure of a few lucky ones to fatten themselves up as they tear apart the company’s bloated flesh, devouring its cash and resources till all is gone. This makes Marissa Mayer’s reputed strategy of buying talent — at premium prices — tragically comical in its utter wrongness. Throwing good money atop bad, in tech, especially, is always a waste.

I am surprised, frankly, that this isn’t the prevailing view. Industry website TechCrunch recently stated:

Yahoo is a company remade. Under the guidance of Mayer, it has refocused its product vision, purchased talent at a rapid rate, and expanded its native content efforts.

Vision? Talent? Native content? For whom? Can you recall the last time you used Yahoo? Your colleagues? Spouse? Children? Parents? Is Yahoo where you would recommend anyone go to for breaking news, tech news, weather, apps, cloud services — for anything other than your sister wanting to check her horoscope?

Pop quiz!

What do you think of the person with a email address?

Second question: do you know anyone who uses their Yahoo ID for any external site, app, or service?

Think of computing, the cloud, the web, apps, smartphones, tablets, PCs. You spend hours with these every single day. They are your work, your play, your means of connecting. You don’t want to be without them, not under any circumstance. Probably none of this activity, however, involves Yahoo. Yahoo is AOL without the dial tone.

Yet, despite this, Yahoo ($YHOO) has more than doubled in the past year.


Do not be fooled. This run-up is almost entirely due to Yahoo’s rather fortuitous stake in Alibaba (and Yahoo Japan). Yahoo’s present valuation is about $40 billion. Analysts estimate that Yahoo’s stake in Alibaba is worth about $36 billion, maybe more. Meaning, Yahoo as the world understands it is worth $4 billion.

Think of that. Yahoo mail, weather, finance…Flickr, Katie Couric, fantasy sports, David Pogue, display advertising…and every other Yahoo service and property — oh, and Tumblr — is worth no more than one SnapChat, and less than half a Dropbox. To spend any of the Alibaba largesse to re-remake or re-rebuild Yahoo is a vainglorious waste.

Yahoo is of such irrelevance, I am still not sure I should even write this column.

It’s not just that the various parts of Yahoo are so meaningless to so many, it’s that their sum is worth so much less. The fact is that everything Yahoo once did at least well and everything it has promised to do going forward is done far better by one or more capable companies. For free. Yahoo has been unbundled to death. It will never get put back together again.

Why choose Yahoo over Facebook, Twitter, Skype. Android? Google Search, Maps, Now? iOS. Siri. Pandora. YouTube. LinkedIn. Roku. Netflix. Foursqare. Yelp. Those digital stickers. Huffington Post. The list of what Yahoo should have been and now can never be is frightfully long.

The company doesn’t even have the benefit of control over its destiny. It is run by techies yet dependent upon the vagaries and cold calculus of Madison Avenue. It gets worse. Last month, Yahoo was forced to reveal its rather shocking reliance upon Microsoft:

Yahoo has revealed in a US Securities & Exchange Commission filing that nearly one-third of its revenue last quarter — 31% — came from its search deal with Microsoft, according to a Bloomberg report. That’s far higher than the “more than 10%” figure Yahoo previously acknowledged.

It gets still worse. Per Bloomberg: “Yahoo’s share of the U.S. digital-advertising market is estimated to shrink to 5 percent in 2015 from 5.8 percent last year, while Google and Facebook both may expand their shares, to 42 percent and 9 percent next year respectively.”

Their irrelevance is accelerating.

Yahoo’s mission is focused, perhaps laudable:

Yahoo is focused on making the world’s daily habits inspiring and entertaining – whether you’re searching the web, emailing friends, sharing photos with family, or simply checking the weather, sports scores or stock quotes.

Except, this simply is not realistic given Yahoo’s limited mobile-social-local strengths. Shut it down, sell it off. Once the Titanic has hit the iceberg, all that remains is to ensure as many get to safety as possible. 

Last week, Mayer emailed employees regarding the firing of Mr. de Castro. Her very first line:

The beginning of a new year always provides time for reflection.

Reflection is not necessary. Yahoo’s time has come.

Understand. I absolutely do not wish ill of anyone associated with Yahoo, certainly not the 12,000+ presently employed by the company. A native Detroiter, I witnessed first-hand what happens to people, to communities, when companies go under. In this instance, however, I believe Yahoo cannot be resuscitated. The longer the delay, the more the vultures will tear at the flesh, till even the very few parts worth saving are no more.

Yahoo!: Tactics Masquerading as Strategy

Last week on Yahoo!’s earnings call, CEO Scott Thompson outlined six points the company would pursue to return the company to a proper focus. When I looked at the list, they all made sense as operational principles or even action items. The big problem is that unfortunately, operating principles or action items aren’t a strategy, and this does not bode well for employees, stockholders, advertisers and even end users. The best strategies are set in the context of a strong mission and vision, neither which Yahoo! has communicated to anyone.

My Personal Yahoo! History

I remember telling a colleague that I invested my entire life into Yahoo!. I had Yahoo! Mail, had all my contacts, my calendar, read all my news through My Yahoo, all my notes in Notepad, and even got weather and movie times from them. I would even start at My Yahoo! for search as My Yahoo! was the first place I started in the morning. Now, I start my day at Pulse News on a tablet or phone over coffee, listen to podcasts while taking my kids to school then then go to Twitter and Facebook for “cultivated” news. I rarely go to a Yahoo! property with the exception to check out stock prices on Yahoo Finance. I’m not alone as Yahoo users have fled to Google for search and mail, Facebook and Twitter for social media, and vertical, specialized sites like Instagram, Pinterest, Foodspotting, and Goba. It all makes sense, though, the story of a big company’s downfall.

Being the 800 lb Gorilla Difficult

Being the largest kid on the block is great at times. I know; I worked for AT&T and Compaq at their peaks. I worked for companies who created and took markets. It was fun as I worked for the more entrepreneurial divisions. I saw IBM in the late 80’s and early 90’s almost left for dead before they became untouchable as they appear at least today. Then there’s AOL who keeps fading farther into the background, buying content brands that are full of conflict. The jury is out on Microsoft and Google if they have already peaked or can move to where they are perceived as the leader. Net-net, being the 800 lb gorilla isn’t an easy thing because of three primary reasons. First, large, successful companies when they get large, become slower and bureaucratic. The inventors are replaced by people who are great at process and but light on vision. Secondly, these companies are concerned more with playing defense and protecting their ground and less out about winning in new markets. Third, these companies face the innovator’s dilemma, where they incrementally improve their services as opposed to investing in disruptive exploration. It’s hard being the 800 lb gorilla. So how does Yahoo! intend to deal with this?

Yahoo!’s Six Points of “Strategy”

On the Q1 2012 earnings call, Yahoo! CEO outlined six “essential elements of [the] plan.” This was after layoffs and after a reorganization. Most companies let strategy dictate organization, but I don’t believe that’s not the case here. Here are the six strategy elements verbatim:

  1. consolidating technology platforms and shutting down on transitioning roughly 50 properties that don’t contribute meaningfully to engagement of revenue
  2. defining our core media connections and commerce businesses, including News, Finance, Sports, Entertainment, Mail and a handful of others. Those properties that generate the majority of our engagement and revenue.
  3. moving engineers into our commerce businesses to put them closer to our user and dedicating some of our best and brightest Yahoo!s to meaningful innovation in those core businesses.
  4. accelerating the deployment of the platforms and technologies we’ve built to make each of our properties more scalable, nimble and flexible, and therefore, less costly and time consuming to run.
  5. making better use of Yahoo!’s vast data to personalize user experiences and dramatically improve advertiser ROI.
  6. refocusing our R&D on Owned and Operated properties and stopping development of a number of initiatives, including platforms for outside publishers and theoretical science that were outside of our core.
These are great tactics and action items but don’t provide any insights into what matter first and foremost.

Where Does Yahoo! Intend to Win?

The tactics above are great in the context of a solid mission, vision and objectives, but Yahoo!’s says nothing about where it wants to win. You see, getting every Yahoo! employee working in a single direction is the right thing to do, but what if it’s the wrong direction? This would be catastrophic and at least what I see communicated this is exactly where Yahoo! is headed. The first question is, “where does Yahoo! want to win that is uniquely valuable to consumers and to advertisers?” That piece is a mystery for Yahoo!. Yahoo! needs to lean into something, and they have a lot of choices as they are still in the large growth segment:

  • local
  • deals
  • mobile
  • social
  • photos
  • living room
  • specialized verticals

I’m not advocating for any one of these at this moment, but Yahoo! needs to choose something, anything, to get the remaining 12,000 employees focused on. I won’t be enough presumptive to say Yahoo! doesn’t have a strategy floating around on the Executive Staff’s desks, but it certainly isn’t being communicated to stakeholders who need it.

Yahoo! Next Steps

Yahoo! needs to regroup after the last few weeks and in the next few months, decide where they want to win,communicate this broadly, then create a supporting strategy, then organize to deliver on that strategy. The last month has been nothing but triage, and if they need to quickly reorganize again to support a real strategy, most of the few weeks will have been a waste of time for the employees. Yahoo! has two paths they can go as a former 800 lb gorilla; the Apple/IBM way or the Excite/DEC way. I’d like to see Yahoo! make a comeback for more than the nostalgia; I’d like to see a Yahoo! comeback to inspire everyone in the industry that comebacks can happen and employees and key leaders can make it happen. That’s good for everyone. Who doesn’t love a comeback?

Why PayPal Is a Bigger Challenge Than Yahoo


A month ago The Wall Street Journal had a big story headlined “War Over the Digital Wallet.” “The subhead: “Google, Verizon Wireless Spar in Race to Build Mobile Payment Services.”

Article mentioned AT&T, T-Mobile, MasterCard, Visa, Citigroup, Sprint, and Apple, among others. The word “PayPal” was never mentioned, which is curious because eBay’s PayPal division is by far the global leader in electronic payments.

But not all of the media were ignoring PayPal. TechCrunch the next day carried a story that began, “Hey PayPal, do you realize people no longer trust you?” It continued: “The public’s perception is that there’s a risk in keeping money with PayPal. If something doesn’t change, startups, causes, and merchants will start processing donations and payments elsewhere.”

Something changed. PayPal’s president, Scott Thompson, quit to take over the CEO job at Yahoo!, a media company. When top executives quit, it’s usually because they want a shot at running a bigger or more interesting company. Yahoo is interesting, in the same way that train wrecks are interesting. He will be the fourth CEO of Yahoo in the past five years, not counting those who held the job on an interim basis. None of the previous CEOs, including Carol Bartz, who was fired unceremoniously in September, were able to reverse Yahoo’s seemingly inexorable slide into oblivion.

It’s hard not to chuckle at the highly respected Thompson’s statement that he was leaving PayPal to seek new challenges. “I like doing complicated, very difficult, very challenging things,” he told Reuters. There are challenges galore right under his nose at PayPal’s headquarters in San Jose.

Being ignored completely by the nation’s leading business newspaper in a major story about digital payments, when you are by far the market leader, suggests a nontrivial problem of public perception.

When a major tech blog (itself criticized recently for potential conflicts on interests) scolds that “people no longer trust you,” that stings. Do people really think that AT&T and Google are more trustworthy than PayPal to handle their electronic banking? When I look at my monthly AT&T wireless statement and ponder AT&T’s craven and almost enthusiastic cooperation with the government’s warrantless eavesdropping on American citizens, I can’t imagine ever trusting my digital wallet to a phone company.

PayPal grew impressively under Thompson’s watch at PayPal, doubling its user base to more than 100 million. PayPal in the third quarter of 2011 processed $29 billion in payments. It operates in 190 countries and 24 currencies and has 15,000 bank partners. Revenue was expected to top $4 billion in 2011, and margins were solid at close to 20 percent. PayPal has grown to the point that it now accounts for more than a third of eBay’s operating profits; I would not be surprised to see the tail wagging the dog before too long. John Donahoe, eBay’s CEO, said last year that he expected PayPal to be bigger than eBay two years from now.

Thompson, who is quite savvy about technology and commerce (“e” and otherwise), is credited with the idea to push PayPal out of the cloud and into retail stores. But Google beat him to it, in part by poaching a couple of Thompson’s top lieutenants. (PayPal’s parent, eBay, is suing Google, alleging that PayPal and Google spent two years developing a partnership, then hired PayPal’s point man, who departed with a laptop full of trade secrets; Google denies the charges.) Google then launched its own “Google Wallet” application, beating PayPal to the punch. PayPal still hasn’t articulated its “wallet” strategy.

PayPal’s push into brick-and-mortar retail stores does not appear to be going well. On a visit to PayPal headquarters a few months ago I tried to buy a cup of coffee from the café that operates in its lobby. Sorry, cash or credit cards only. PayPal was not accepted in PayPal’s own headquarters.


Naturally, everyone wonders what Thompson will be able to do in the Augean stables of Yahoo. It is astonishingly hard to revive a declining Internet company, and the task is made more challenging because Yahoo is a media and advertising company very different from PayPal. Both companies recognize, however, that the future belongs to the company that can harvest and sift and parse data, and that’s an area where Thompson has strong chops.

PayPal’s Donohoe said he was shocked by Thompson’s sudden departure; Thomson resigned Tuesday and starts his new job at Yahoo on Monday. Donohoe himself will act as PayPal’s interim president, and promised a “seamless transition.” The person who eventually takes the big chair at PayPal has huge challenges ahead, starting with getting PayPal accepted in its own building.

What is Yahoo’s Fate?

I wish I could confidently proclaim that Yahoo’s best days are ahead or them. The fact of the matter is they are in a hole in which they can not emerge without serious help.

Yahoo like most companies lacks vision. If we where to ask Yahoo executives what the online world will look like in 3 years and where is Yahoo’s value in that world, I’d bet we would get a blank stare. The industry perception of Yahoo has been that it is largely irrelevant. They have some very interesting assets, assets that bring in revenue. The problem is they don’t have enough assets brining in enough revenue and they have not been creating any new real value.

All of this Yahoo news is in stark contrast to the news that Facbook has now doubled its first half revenue to the tune of $1.6 billion.

Facebook is killing it in revenue and Yahoo is going the opposite direction.

So what is to come?

The obvious answer is hire a new CEO. The only problem is who is on the market with vision, leadership, communication skills, execution etc that can turn this company around? It is akin to the sports world when there are no big names in the free agent pool. Unless they should take seriously Snoop Dog’s desire to become CEO. Who knows maybe he is exactly who they need – i’m half-joking.

Another element to consider is in uncertain times like Yahoo is going through people start worrying about their jobs and good talent starts looking elsewhere. Furthermore how can they expect to attract new quality talent with this turbulent ride Yahoo is on.

My advice to Yahoo is to start selling off assets rather than the whole company. Flickr for example could be very valuable to a number of folks in the industry. Their Fantasy sports assets could be sold to CBS or ESPN for example. Perhaps Google would want all their email customers.

The bottom line is Yahoo has lost mind share within the industry and with consumers. There is still revenue to be had with their assets and the responsible thing for the company and the board to do is to now minimize the damage and sell the assets to return something to shareholders.

Key Takeaways from Yahoo’s Troubles

Thinking quarter to quarter or even year to year is a failing strategy. Innovate or die.

What is more concerning is that this lack of innovative spirit seems to be a trend I am seeing in larger corporate institutions in the technology sector. More on that to come.