How Yahoo! Screwed Up Flickr

NEW YORK (TheStreet) -- It was 2005 and the world, Silicon Valley in particular, was between Web 1.0 and Web 2.0, two very different periods. Web 1.0 held the rise and fall of companies like AOL  (AOL), Yahoo! (YHOO), Netscape, and others. Web 2.0 has seen the emergence of companies like Facebook (FB), Instagram, Twitter (TWTR), LinkedIn (LNKD) and a host of others. Flickr, the photo-sharing Web site and app, was exploding in growth, but the company needed cash. It faced two decisions -- either take venture capital money, or sell out and hope for the best.

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What happened in the following years led to Flickr's downfall, and led to the rising of Instagram and a subsequent $1 billion acquisition of Instagram by Facebook that some have said should have been Flickr's to lose.

"We were a six-person company, based in Vancouver, and it was a fairly difficult thing to keep the lights on," said Caterina Fake, co-founder of Flickr and Findery and Chairman of Etsy, a Brooklyn-based online marketplace, akin to eBay  (EBAY). "We were perpetually running down to the border to pick up our Dell servers, to rush to the colocation center to plug them in, to install the software and get them up and running because the thing [Flickr] was almost collapsing."

In 2005, the Internet was a very different place for start ups, especially ones that were seeing rapid growth. There was nothing like Amazon's (AMZN) Web Services (AWS), which most startups depend on now. AWS allows businesses to "[b]uild architectures from day one that will scale up automatically with your business." Companies that have used AWS for their services include the aforementioned Instagram, Animoto, Pinterest and countless others.

Fake noted that Flickr was scaling so fast it couldn't keep up. It was faced with an emergency situation --  either raise money from venture capitalists in the Valley or elsewhere, or sell to a conglomerate. Flickr took the sale route, handing the company in its entirety to Yahoo! in March 2005.

Flickr was allowed to continue managing its community, which as a company focusing on user-generated content, was great. "We were allowed to continue to manage the community, and I think this is a very important thing when you have a community of user-generated content, that they be able to maintain the particular character of the community," Fake said during an interview.

Following the acquisition, Flickr was taken over by the mobile team, and that's when things started to turn south. The company suffered from a lack of investment and resources put into the company under Yahoo! CEOs Terry Semel, Carol Bartz and Scott Thompson. During the years of Semel, Bartz and Thompson, the Web was undergoing the transformation into Web 2.0, where social networks and in particular, companies that let others share moments and engage with others.

In 2010, Instagram, a tiny photo-centric app built with just 13 people, started to take the world by storm, launching as an app on Apple's (AAPL) iOS operating system. By 2012, the company had exploded, and prior to Facebook's initial public offering, Facebook announced it was buying Instagram for $1 billion in cash and stock. By that point, it was too late for Flickr to be what Instagram had become, as smartphones and tablets replaced PCs for people's computing needs. "Instagram came along and absolutely ate Flickr's lunch," Fake stated. "Flickr should've been on big on mobile, but it didn't work out that way."

Flickr is currently ranked 38th on Apple's App Store for free photo and video apps, compared to third for Instagram. Snapchat and Google's  (GOOG) YouTube are ranked first and second respectively, on the App Store. Though Google Play does not rank apps the way the App Store does, Instagram is at the top of list, while Flickr is not listed, and has to be searched for.

Though Flickr didn't run into this, Fake noted there is a tendency for larger companies to swallow the smaller company they've acquired, and "kill the goose that laid the golden egg." It wasn't until Marissa Mayer became CEO of Yahoo! has the social network and photo-sharing app received so much attention. The app has gone through a complete redesign, and now allows users 1TB free worth of storage, making storage seemingly limitless.

This coincides with Yahoo!'s renewed effort to be more mobile-centric, a fact that Mayer has touted seemingly ad nauseam. On Yahoo!'s latest earnings call, Mayer noted Yahoo! has more than 430 million mobile users, up 30% year over year. The company recently purchased Blink, a clone of popular messaging app Snapchat, in addition to the many mobile-first companies Mayer has bought in the past bought 18 months, including Summly, Jybe and others.

Fake, who resigned from Yahoo! in June 2008 after her soon after the departure of her now ex-husband Stewart Butterfield, said the resurgent interest in Flickr, particularly from  Mayer is encouraging. "I credit her in seeing the opportunity and understanding the potential of the product that was still there. I think the Tumblr acquisition was a good corresponding social acquisition that Yahoo! has made and I'm hopeful about its continued evolution."

-- Written by Chris Ciaccia in New York

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