Andrew Keen on New Media

A friend of mine – who will have to remain nameless – is an executive at Yahoo. A few days after Microsoft announced their intention to purchase Yahoo for $44.6bn (£22.9bn), we met for lychee martinis and post-deal analysis at the bar at the top of the Mark Hopkins hotel in San Francisco.

Although the Microsoft-Yahoo deal – if it goes through – would make my friend a wealthy man, there was nothing celebratory about the way he gazed out at the dusk shrouding the San Francisco Bay. "The deal confirms Yahoo as the most successful failure in Silicon Valley," he told me wistfully, sipping his second martini of the early evening.

My friend is right. In 50 years' time, when the digital dust has settled and the authoritative history of the internet gets written, the chapter about Yahoo will be a narrative littered with missed opportunities. Yahoo is a frustrating story of shoulds. It should have become the Microsoft of the internet. The Silicon Valley company should have become the legal monopolist of digital information. Above all, Yahoo should have acquired the titanic economic power of Google and should now represent the internet's future rather than its past.

Yahoo's failure is, of course, relative. Most internet entrepreneurs would sacrifice their wives and mistresses, their children and even their new sports cars to "fail" like Yahoo. The site remains the most popular single destination on the web and will probably be valued at more than the $44.6bn currently on the table. Yahoo has around 500 million monthly users, it has the second-most popular search engine (behind Google, of course) and, after Google, is the largest seller of advertising on the internet with $5.1bn (£2.6bn) in revenue in 2007. Add Yahoo's dominant email service as well as smart acquisitions like the photography sharing site Flickr and you have an internet company that, by any conventional standard, appears to be anything but a flop.

So why is Yahoo no more than a successful failure?

In January 1994, while Google founders Sergei Brin and Larry Page were still obscure university undergraduates, Yahoo founders Jerry Yang and David Filo founded an internet site called "Jerry's Guide to the World Wide Web." It was a primitive internet search engine that quickly attracted a huge user base. Three months later, Yang and Filo changed the name of their site to Yahoo, raised a million dollars in venture capital and began to pioneer the business of selling advertising around their increasingly popular search engine. Yahoo was Google before Google. Yang and Filo had stumbled upon the internet's Holy Grail – they discovered that the great hunger online was for instant information and that whoever most efficiently sorted and delivered this knowledge would become the king of new media.

But Yahoo never grew into a mature Google.

Instead of expanding the technology of its search engine and focusing exclusively upon dominating the nascent search business, Yahoo tried to build itself as a portal – an all-purpose front door to the internet.

So when Google launched its own search engine in 1999, Yahoo outsourced Google's product and allowed its tens of millions of users to become intimately familiar with a superior technology from a rival company.

"We could have bought Google!" my Yahoo executive friend exclaimed swallowing his fourth lychee martini, his mood now as dark as the San Francisco night that had enveloped us at the Top of the Mark.

He was right. In what now seems like prehistory, at the turn of the millennium, before Google emerged as the economic titan of the internet, Yahoo – with its massive public valuation and stash of cash – could have easily gobbled Google up.

But Yahoo failed to execute. Instead of buying Google, it acquired second-best search engines – Inktomi in December 2002 and Overture in July 2003 – thereby conspiring to make itself the perpetual runner-up to

Google in the critical internet categories of search requests and online advertising revenue.

Meanwhile, having failed in its portal strategy, Yahoo decided it wanted to become a media and entertainment company.

So, in the spring of 2001, they hired a Hollywood guy – Terry Semel, the former chairman of Warner Brothers – as CEO. But not only did Semel fail to buy Google (he met Brin and Page several times to negotiate an acquisition), he also failed strategically to grasp the next big thing on the internet – the Web 2.0 revolution of user-generated content and social networking.

So rather than Yahoo, it was Rupert Murdoch's News Corp that snapped up the dominant social network MySpace for $580m (£298m) in July 2005.

And instead of Yahoo, it was Google that bought the next generation video platform YouTube for $1.65bn in November 2006.

Semel left Yahoo in June of last year – to be replaced as CEO, ironically, by Jerry Yang, the original architect of "Jerry's Guide to the World Wide Web".

But the second-coming of Yang isn't in any way analogous to Steve Jobs's miraculous return to Apple. Yang tinkered for six months, warning of job cuts and cost-cutting measures, but failing to set out a fundamentally new strategic direction for his company. And so Microsoft, that cash-rich vulture from the north, pounced, launching its $44.6bn hostile take-over a couple of weeks ago and triggering an inevitably protracted struggle for the corporate soul of Yahoo.

Is Microsoft getting a good deal? I talked to Simon Levene, the former managing director of corporate development at Yahoo and now a London-based venture capitalist at Accel Partners. Levene is more optimistic about the long-term value of Yahoo than I am.

He thinks that the first decade of the internet was PC-centric, while the second decade will be all about wireless.

In Levene's view, Yahoo is much better positioned than Google – particularly in China and Japan – to dominate the complexities of the global wireless business. Levene might well be right.

But given Yahoo's perpetual runner-up status and its history of missed opportunities, it is hard to imagine that the company is ever going to be remembered as anything but the "most successful failure in Silicon Valley".

Good news for audio book lovers

The Microsoft take-over of Yahoo might have hogged the news over the past couple of weeks, but another recent deal will probably have a much more immediate and interesting impact on everyday internet users.

On 1 February, online retailer Amazon announced that it was buying Audible, the excellent audio book web business, for $300m (£154m). This promises to be a great move for lovers of audio books like myself. Amazon can integrate Audible products into its retail store and has the economic muscle to promote audio books more aggressively. Moreover, it will be interesting to see how the Audible purchase will impact on Amazon's electronic book – the Kindle. Adding the Audible library to the Kindle, of course, gives Amazon all the ingredients for a literary iPod killer.