October 23, 2005 is when Yahoo acquired a stake in Alibaba. A year before, Google had gone public and, rather than invest in others, Google was investing in itself. Yahoo co-founder, Jerry Yang engineered the acquisition of 46% of Alibaba, but that deal may have marked the end of Yahoo. For afterwards, one company thrived and the other did not.
Google thrived by outspending Yahoo in terms of capital expenditures. Companies, like people, grow by reinvesting in themselves. You can earned more with an education, so you invest money and time in acquiring one. Companies spend money on capital expenditures which allow them to expand their business, so in the future they can receive increased cash flows from operations.
Google spent three, four, five, and finally six times the amount Yahoo was spending on capital expenditures during 2005 to 2010. Spending only slowed after the Lehman Shock of 2008 for both companies, but Google still spent twice as much as Yahoo as shown in Chart I. In 2005, Google spent $800 million and five year later was spending $4 billion on capital expenditures.
It’s difficult knowing where the money was actually going, though. In its 2005 Annual Report, Yahoo said it purchased “information technology assets to support our expanding offerings, our increased number of users and our international growth.” While in same year, Google disclosed it spent partly for “information technology infrastructure….”
Then a secret, but now more better known, Google was quickly building and leasing lots of data centers. In 2008, Nicholas Carr would explain Google’s technology strategy in the The Big Switch. Google’s then business strategy is even simpler to explain here: build data centers to spend search inquires, attract users, sell ads and then repeat.
Google beat its rivals in search and increased its operating cash flows. In 2005, both Yahoo and Google earned approximately $2 billion from operations. But afterwards, Google’s cash flows increased two, three, four, and five times from the level set in 2005. In 2010, Google cash flows were now $11 billion. By comparison, Yahoo’s cash flows from operations in 2010 were lower, not less than zero, but $1.2 billion as shown in Chart II.
Yahoo did not reinvest in its core business in the same way as Google. Yahoo did spend $1 billion and its China properties for a piece of Alibaba. Yahoo’s Alibaba investment has paid off and now represents most of Yahoo’s value. And after Yahoo sell its core business, patents, and other assets, the Alibaba stock will be all that remains for shareholders.
Yahoo could have spent $1 billion in other ways, but did not. Google said back in 2005 that “investments in our business are generally made with a focus on our long-term operations”. Yahoo fell behind long ago, because it didn’t keep up and move ahead. And that all began on October 23, 2005.
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