Gravity was the one deal Yahoo should have closed but couldn’t

By Michael Carney , written on January 23, 2014

From The News Desk

This morning news broke that AOL acquired Gravity, an LA-based interest graphing and Web personalization company with MySpace roots. Talking to people on both sides of the deal, it seems like a wise move for all involved, even if selling to AOL is the last thing on the list of goals for most founders.

AOL gains access to a phenomenal technology platform and a capable team for what one might argue is a steal of a price ($90.3 million in cash, plus earn outs) given the revenue impact it could ultimately have on its bottom line. Gravity, on the other hand, gets to leverage its acquirer’s scale (hello network effects) and an injection of resources to make its task of organizing the Web for the post-search, post-social era infinitely more viable. And, I’m told, all of Gravity’s investors made a meaningful return. Win, win, win.

But no one’s mentioned the big loser: Yahoo.

When newly-appointed Yahoo CEO Marissa Mayer spoke at Davos in January 2013, she laid out plans to build an interest graph and deliver personalized content experiences to all Yahoo users. It was part of her grand “Daily Habit” plan. The problem was, as Mayer admitted, Yahoo was “a few years away” from having the technology to deliver on this.

Gravity, however, was nearly three years down the road of both building this technology and gathering the mountains of data needed to power it. It launched its publisher API just weeks later, in February.

According to sources close to the situation, Yahoo and Gravity started exploring ways they might work together shortly after Mayer’s Davos talk. This included a series of test integrations, in which, according to these sources, Gravity outperformed expectations and blew away the nascent personalization tech that Yahoo had begun to cobble together.

Although it wasn’t clear at the time, it’s become ever more obvious that Mayer’s long-term vision for Yahoo is one in which content plays a major role. Much to the chagrin of Valley observers, the company has spent millions on marquee hires to produce its own premium content, while continuing to act as one of the largest aggregators and portals on the Web. There’s only one problem: Yahoo’s ad business is declining rapidly. By all accounts, this is the reason Mayer fired COO Henrique De Castro last week, despite his gargantuan golden parachute. The company’s Editor-in-Chief Jai Sing also left.

What could Yahoo do to drive more advertising revenue? One obvious answer is to deliver better content to its audience. More specifically, it could deliver the right content, to the right audience members, at the right time. It could personalize. Gravity has demonstrated its ability to do exactly this. Early last year, the company reported observing 200 percent increases in click-through rates, loyalty as measured by monthly return rate up 300 percent, and pageviews increasing in some cases by as much as 40 percent across its publisher network. It’s little surprise that Yahoo was apparently interested in working with, or potentially acquiring the company.

So what went wrong?

The short answer appears to be politics. According to our sources, Yahoo couldn’t decide whether it wanted to buy or build its own personalization tech. The would-be acquirer also had different notions of how it would integrate Gravity's personnel. Yahoo wanted Gravity to relocate, but AOL allowed them to stay in LA.

Make no mistake about it. Yahoo tried to get a deal done here. It just whiffed.

It’s sort of ironic coming off a year in which Mayer went on a buying spree like a super couponer on black Friday, snapping up dozens of middling startups and Series A crunch victims. Of course, she also bet big on Tumblr, but even that’s struggling. Across the board, none of these deals have even made a dent in Yahoo’s bottom line. The only thing they’ve done is alter the outward perception of the company – a viable short-term strategy, perhaps, but one that is starting to wear thin – and eat away at its balance sheet.

Gravity, on the other hand, is the kind of unsexy acquisition that, with deft integration, could have driven hundreds of millions if not billions of dollars into Yahoo’s struggling ad business.

So AOL’s Armstrong won. In a memo to the company’s “brand group teammates” today, the CEO writes:

While evaluating a network-wide commercial deal with Gravity, we determined that owning the technology that powers personalization on our content pages is imperative as we didn’t want to become dependent on a third party’s ability to provide this functionality for an important consumer facing, core aspect of our business. We also realized that by owning this tech, AOL could own a key component of the web’s plumbing and offer it to our network of publishing partners.

Yahoo won’t feel the pain of this loss immediately. The company is still riding high on its Alibaba holdings and the final stages of that new CEO smell. Eventually, though, Yahoo needs to drive revenue growth. Yet Mayer has not expressed a coherent strategy to achieve this, let alone shown an ability to do so.

If content is a core part of Yahoo’s business, then it’s a good bet that personalization will be a critical part of its future.

Unfortunately, without Gravity, that future appears to still be “a few years away.”

[image via wikimedia]