CONTEXT: As you look out a few years, what new technologies will change the way people think about the Internet?

JERRY YANG: We think three technology-related developments could be megatrends.

One is bandwidth. Not only will the average person get broader bandwidth, increasing the speed of his interactions on the Internet, but bandwidth will also become much cheaper. That’s important because the price of bandwidth is probably the biggest barrier to getting more people on the Internet globally. Using the Internet still costs a lot of money, even in developed areas like Europe.

Second will be new classes of devices that hook up to the Internet. Already, the personal computer is no longer the only way you can get on the Internet. You can do it from your [landline] phone, your cell phone, your PDA [personal digital assistant]. You can use your cable-television hookup.

The third thing is the way people will interact with these devices. The keyboard has been the primary means of interaction, and it’s still hard to enter a large amount of data any other way. But voice will play a growing role. Voice-recognition will let people use their devices by talking to them.

CONTEXT: Are there particular devices that you’re especially optimistic about?

YANG: There’s a whole new genre of Internet-specific devices, such as very cheap, pager-like, wireless devices that let you get your e-mail.

Ultimately, there will be an entire class of wireless home devices that you can use wherever you want—in your kitchen, your family room, your study, your kid’s room—and that will all serve different functions. It will be possible to hook up everything, even your refrigerator, to each other and to the Internet. The home will become a network, with mind-boggling power. The effect will be like what happened when the telephone got into the home.

The devices trend still has a ways to go, but we’re already seeing a tremendous number of initiatives.

CONTEXT: We recently did a piece saying that the basic idea behind Web phones is great but that the current incarnation of the phones will be a disaster because of limitations on screen size, keyboard size, and bandwidth. [See "Web Phon(i)es," Context, February/March 2000.] What do you think of them?

YANG: I agree with you. But it depends to some extent on what part of the world you’re talking about. In places where PDAs and PCs are highly penetrated, such as the U.S., most people still prefer to use them to interact with the Internet. But when you go to places where they don’t speak English, or don’t have keyboards, it’s a totally different mentality. In Europe, for example, they tend to use "short messaging" devices even though typing messages on cell-phone keypads can be terribly painful. [To type a letter on a cell phone, someone may have to hit the number key that contains the letter, then hit a 1, 2, or 3 to indicate whether he wants the first, second, or third letter.]

Cell-phone capabilities will probably be extended greatly over the next couple of years because you’re beginning to see that cell-phone providers don’t think about these as just voice devices anymore. They’re starting to think about these as data and voice devices. We think video will also play an important role. You’ll start seeing the screens on these devices become larger, and you’ll see more streaming video [TV-like images] on these screens. We’re at a very, very early stage of what mobile devices can do.

The devices that are going to be spread around the home and hooked to the Internet will also get video and audio. I think that’s going to have profound implications, as well.

All these things will happen over the next five years. We say, Hey, the more ubiquitous, the better. The more ways people can get access to their data, the better.

CONTEXT: I can imagine that when my six-year-old becomes a teenager, I’m going to have very different conversations with her than I had with my parents when I was that age. I’ll say things such as, Shannon, how many times do I have to tell you that when you finish a box of cereal you have to debit the pantry? How else will our home network know to order more?

YANG: I hope things won’t be quite so mechanistic. The system should just somehow automatically scan the little bar codes on groceries every time they’re taken out of the pantry or refrigerator or are put back in. Then, maybe the system will remind you to order milk and, if you agree, will arrange delivery.

CONTEXT: I hope you’re right. Let me ask you about a few, more immediate issues. For instance, what are some of the big issues that companies face today as they try to do more commerce over the Internet?

YANG: A lot of people talk about the fulfillment issue, about how you deliver to people all these things that they buy on the Internet. But perhaps a more important issue for companies is service. After all, you can’t spend all your money figuring out how to acquire the next customer. Once you acquire them, you have to keep them. To keep them is a service business.

Whether that means handling returns well, finding a way to follow up without being intrusive, making sure a product is shipped on time, providing coupons, or giving discounts—all these approaches are important elements of service. And the list goes on. The customer wants to know that if he orders something he can either pick it up or have it sent to him, and that even if it is shipped to him he can return it later at a physical location. All these things sound boring, but they’re very, very important.

Price is not the only thing that people will judge companies on. For most things, people will pay a little more for convenience. The Internet is a great pricing mechanism, but it also has to be a great convenience mechanism.

CONTEXT: How about the possibilities in one-to-one marketing? That seems to be another of the great promises the Web has yet to fulfill.

YANG: I think the technology is here. It’s possible to collect information on people and market to them as individuals. But, at the moment, people are still marketing to groups. I can probably say, Let me find males, between the ages of 18 and 30, who like sports and live on the West Coast. That’s pretty good targeting. But, even if I go further and track the behavior of the individuals in the group, just because someone bought a bottle of wine last week doesn’t mean he wants a bottle of wine this week.

True one-to-one marketing doesn’t happen until I can get customers to raise their hands and tell me that they want something, so I can then try to satisfy that need or desire. That’s starting to happen. People are saying, I want two tickets to go someplace. Or, I want a job; here is my resume. Then they sit back and see who will give them the best deal.

The question is, What is the right business model? How do you do this sort of marketing on a large scale? Some companies are doing demand aggregation. They’re getting customers to identify themselves by promising that, the more people who bid for an item, the lower the price the on-line business will be able to negotiate on their behalf. I think we’re all trying to hit at that question of how do you aggregate consumer buying power. I think it’s really important.

There are some privacy issues, though, as you try to get people to tell you about their interests. You want to make sure that you don’t take people’s privacy for granted. You have to mediate strictly between those people who really want to give up their privacy, in return for a better deal, and those who say, I don’t want you ever to know anything about me. Privacy is an emotional issue.

CONTEXT: A couple of years ago, one of the big debates was about the security of on-line transactions. That seemed to me to be a bogus issue because people are accustomed to using credit cards, and using them on-line isn’t much different. But the privacy issue strikes me as a tough one.

YANG: I think privacy is a real concern because you have such inconsistencies, or at least perceived inconsistencies, in terms of how companies handle privacy on the Internet. I think the best way to resolve the problem is to make sure that use of personal information is permission-based. An intelligent consumer ought to be told what he’s saying ‘yes’ to when he buys something on-line. If personal information about the buyer or the transaction is going to be used, the seller should trade something for that information. The consumer should also know that there are protections, that he won’t be completely sold out. In most cases, it’s actually more important for the consumer to know how his information won’t be used. Businesses have to build services that people trust.

CONTEXT: How do communities of interest play in all this?

YANG: We are very big believers in community.

What we’re seeing at this stage of the Internet’s development is a sea change. Before, you had the Grand Central Station effect: The Internet was used by 100 million people who didn’t pay attention to each other and were just trying to figure out where to go. Next, people began to be organized into classifications, such as all the males and females 60 years of age and above, and all those 20 years old and younger. Now, the groups can be really small. You can identify a collection of 10 people who come every day to the equivalent of a cafe. You can help 15 people get together and play bridge on-line.

You’re going to have a million small communities. I’d rather have a million small communities than five large ones, and I think that’s really the next step for being able to make the Internet even more relevant. Companies that help people form those communities are going to be a lot more successful than those that don’t.

CONTEXT: When did you decide that the Internet was a really big deal?

YANG: I think when we started out we had an inkling that this thing could be really huge. We realized it was going to change the way people publish information and share information.

But we, meaning David Filo and I, never thought there were any commercial possibilities as recently as early 1994. It became a really big thing for us when we realized we could get this thing funded as a company. Even then, we thought we were going to fail rather than succeed. Then it became a public company that was really getting somewhere. And it’s gotten bigger ever since. I do think we’re just in the beginning of what it could be.

CONTEXT: How important was your decision to invest heavily in your brand from the very start?

YANG: People attach an emotion to our service. If we don’t have that emotion, we’re just like every other service. We don’t get people to come to the site by saying we have 10 million Web sites and our competitor has nine million. We’re not going to get them here by saying our response time is one nanosecond faster than our competitors’. We’re going to get them based on an emotion, based on the idea that they’re going to have fun, or that they’re going to solve a problem they’ve never been able to solve before.

We had to invest in brand so that people could see us as more than just technology. That was important, even though the expense of the investment meant that we couldn’t develop some new product as fast as we wanted or hire as many people as we wanted.

CONTEXT: You talk about scarce resources. But that was actually a decision you made. A lot of dot-com companies don’t worry much about constraining spending because they’ve decided that the game is to expand as quickly as possible. Why did you decide from Day One that you should be profitable?

YANG: I think this also goes back to the key people who think about where the company ought to go. There has always been a lot of hype around Yahoo and a lot of hype around the Internet, but we’re not "hypey" people. We want to show that what Yahoo does is valuable. We want to show that this is a profitable business.

Probably as early as 1995, before we even went public, we said, Look, can we actually run this business profitably? Nobody knew at the time whether you could have an advertising-based business on the Internet. We tried it for a quarter, and we were profitable. Then we decided to go public. After we were public, we decided we had to show the world that an Internet company can be profitable—in fact, can be very profitable. That’s not without trade-offs. Other companies can spend more money because they’re willing to lose money.

CONTEXT: Yahoo is the most successful, primarily advertising-based business on the Internet. Do you see that advertising model persisting, or do you see it changing?

YANG: I think that what started out as pure advertising has evolved to be much more comprehensive over the past four years.

We have an audience from around the world that is now about 100 million to 120 million users a month. We have great information about the audience because they tell us their preferences. We have developed a unique ability to deliver different audiences to our advertisers or promotional partners.

While they used to just be able to advertise to our users, they can now do advertising, promotions, or direct marketing. They can sponsor or host events. They can do customer-satisfaction surveys and market research. Some, such as companies in financial services, can actually complete transactions on-line, because they never have to deliver anything physical. I think the ability to conduct an entire transaction on the Internet is a very big deal.

Advertising is still a key component of what we do, but we now think of ourselves as helping our partners do "fusion marketing."

CONTEXT: Are you wrestling with any new sorts of issues today?

YANG: One of the nice things about the Internet is that it changes as time goes on because users are changing. You don’t have a static audience. What users were doing three years ago is very different from what they’re doing today. So, you have to continue to change.

But we still face the same basic kinds of issues. It still feels like we’re all overworked. We’re all constrained by the minutes we have in a day. We’re constrained by how many smart people we can hire. We still have to make very cautious choices about what we can do and do well.

The matrix of decisions is bigger than it used to be, but we still face the same sorts of issues. Do we invest in branding? Do we invest in people? Do we go to China, or do we go to Brazil?

A lot of people say, Hey, Yahoo does everything, right? You guys have so many services, you’re known all over the world, you’re doing this and that. The reality is that we say ‘no’ more than we say ‘yes.’ We really take the time to say, Hey, here are the 10 things we’re going to do well. We’re going to focus.

CONTEXT: I was always taught that strategy is what you don’t do.

YANG: The worst thing is to go start on something and fail, because you’ve not only wasted time but you’ve also wasted resources.

CONTEXT: If you look at other companies, whether established ones or start-ups, what are some of the biggest mistakes that you’ve seen them make?

YANG: The biggest mistake that established businesses make is not realizing that the Internet is going to change any business that touches consumers. Most executives realize that now, but realization took a long time—four or five years for a lot of companies. Still, some don’t get it.

People need to realize that the Internet needs to be part of a company’s DNA. If it’s just an experiment, if it’s just a toe in the water, if it’s just, Let’s try it out and see what happens, they’re going to fail.

On the flip side, start-ups often make a lot of mistakes because they try to do too much. There are such overwhelming expectations for start-ups. People there say, Hey, we have a whole world of opportunity in front of us. If we don’t take advantage of all our opportunities by the end of this year, we’re dead. The reality is that they’re right. They’ll be dead if they don’t exploit all their opportunities. But if they try to do everything too fast, they’ll be dead, too.

CONTEXT: You get this last question all the time, but I have to ask it anyway. What about the stock valuations of Internet companies? Do you think we can maintain this sort of level?

YANG: It’s a fun question for all of us to speculate about. But I’m glad I’m an entrepreneur, not a stockbroker, because it means I don’t have to make that guess.

I think of this as a football game. The members of the management team are the coaches on the field. We’re told the mission is to win. So, we play the game. The only thing we’re doing is trying to win. How much people pay to watch the game, or who they’re betting on—the coaches and players have no control over that.

If you look at Yahoo, you’d say that it’s early in the first quarter, and we’re winning by a touchdown. If we go on to win, if we stay in our leadership position, then whether Internet stocks are high or low doesn’t matter. We’ll be valued higher than all of our competitors. If we lose, we won’t be around to talk about this. It won’t matter.

As entrepreneurs, we’re focused on how we produce the next score. Whatever happens to the stocks is up to the spectators.