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The Digital Skeptic: Will Facebook Follow Yahoo Down?

NEW YORK ( MainStreet) -- Let's play a game of money manager Mad Libs. You know -- make a story, swap one set of the nouns and adjectives for another and, voila. Comedy! Except, of course, since we're considering Facebook (FB - Get Report) and Yahoo! (YHOO - Get Report) today, we're probably talking tragedy.

Because, let's face it, Facebook is looking more like Yahoo's 2.0 every day.

Like Facebook, Yahoo was whipped up by students at a big school with a big idea. It was 1994 and Jerry Yang and David Filo, two grad students at Stanford "began messing around on the World Wide Web," writes Andrew Clark of The Guardian.

The two had a blinding flash: You could organize the Internet into a hierarchy. And, according to the Yahoo website, they created a "home-brewed" list of favorite links called, I kid you not, Jerry and David's Guide to the World Wide Web. Yes, that is pretty much what your kids do on their iPads these days. But back then it was enough to spin up billions in market cap. Go figure.

A hip, new name quickly came: Yahoo! And the start-up was off to the digital races. Money poured in -- in this case, from Sequoia Capital. There was the same frantic Facebook-like rush to fill every conceivable niche on the Web. Search engines were devised. The site became a "Web portal." (Can anybody tell me what that means? A hole in the Web?) It dabbled in content. Top managers were recruited -- Tim Koogle from Motorola (MOT) came on. And by April 1996, Yahoo, with 49 employees, saw shares run up 156% on its first day of trading. Yang and Filo were instant, Zuckerberg-scale billionaires.

Like Yahoo ... but on the second market
I realize today's Nasdaq investors should only be so lucky to have had a Yahoo-like first day of trading. But for insiders -- and those who played Facebook "stock" on alternative markets such as New York City-based SecondMarket -- should find Yahoo!'s wild ride familiar.

A SecondMarket representative declined to comment on the specifics of the value of Facebook before it went public. Instead I was referred to an infographic that breaks out the history of Facebook on private exchanges.

This chart is simply a must-see for anybody anywhere close to this operation.

There is where you will see the same Yahoo-like blind rush to scale: The "like" button comes online February 2009, Digital Sky Technologies bets $200 million. No-name companies such as ShareGrove, Hot Potato, Drop.IO are all gobbled up. Heck, there was even a 5-1 stock "split" back in October 2010. (Whatever that means. Who did the splitting?)

For these jaundiced eyes, the Yahoo Groundhogs Day vibe in this chart is clear. We are already seeing Yahoo-like managers, products and company strategies coming and going at Facebook. Remember how bright people such as the dude from PayPal (EBAY), Scott Thompson, ran the show? Microsoft (MSFT) trying a merger back in 2008? And Carol Bartz, who I always thought did a heck of a job at Autodesk (ADSK), took her turn at the helm -- which of course, ended poorly.

"I am very sad to tell you that I've just been fired over the phone by Yahoo's chairman of the board," Bartz typed on her iPad in a widely quoted, leaked memo in October.

The same, and maybe the same down the road
The fact is, the operations share the same, tired Web story. Both are launching a fabulous functionality that kicks the nitty-gritty business details down the road. Both try to scale in a world that values their core product -- information -- less and less each second. And both must operate in a ruthlessly competitive global market with nano-inch-high barriers to entry.

And very tellingly, they share similar income statements: About $4 billion in annual earnings, $1 billion in annual net income. Go look. It's "holy cow" stuff.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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