One thing Silicon Valley industry insiders like to knowingly whisper to each other is that Facebook is the new Yahoo.
This winter, Facebook halted the rollout of a beautiful redesign.
The reason: The company realized that while the redesign looked great on new computers with big, sharp screens, it was hard to use on older computers with small, crappy screens. Most of Facebook's users still have small, crappy screens.
So, Facebook scrapped the photo-rich redesign and came out with a design that, while it may look like it's from 2009, works really well for most of its users.
If Facebook can’t innovate on design because of its huge install base, then it really is becoming the next Yahoo.
Almost since its beginning, Yahoo has dealt with a classic innovator's dilemma.
It couldn't try really radical things with Yahoo.com because Yahoo.com was already such a huge business due to its popularity with hundreds of millions of mainstream users.
This left Yahoo vulnerable to smaller companies that can do radical things, because they have not yet become dependent on an existing business. Eventually those smaller companies, Google and Facebook among them, became much bigger companies that ate into Yahoo's revenues.
Now, Facebook is dealing with the same problem.
It can't redesign its site in a really cool, modern way that will appeal to users of 2017 because it would annoy the billion users it picked up starting in 2004.
This leaves it vulnerable to startups that can build social sharing tools optimized for tablets, phones, and computers built with today's technologies. Those startups don't need a billion users today to keep growing until they can start taking ad dollars away from Facebook.
The good news for Facebook shareholders is Facebook CEO Mark Zuckerberg seems to realize how much his company looks like Yahoo from circa 2005 and he's doing something about it.
Zuckerberg is using Facebook's massive market cap to make stock-rich acquisitions of startups doing the risky, innovative things Facebook can no longer do with Facebook.com. In the past 16 months, Zuckerberg has spent $22 billion purchasing Instagram, Whatsapp, and Oculus.
You may wonder why the people running Yahoo didn't do the same thing a decade ago.
The truth is, they tried to.
But they made one big mistake that Zuckerberg isn’t making.
Specifically, they worried too much about paying the exact right price for big-ticket acquisitions.
There's one really good example of this from Yahoo's history.
Back in 2006, Yahoo could have purchased a small, fast-growing startup that has, in the years since, become a $150 billion+ company.
Yahoo's board and this startup's board had both approved a deal that would have sold the startup to Yahoo for $1 billion.
But then, at the last minute, Yahoo's CEO, Terry Semel, decided $1 billion was too much. He went to the startup's CEO and told him the price he was willing to pay was now $850 million. That price was more in line with what Semel's CFO, Sue Decker, thought the startup would actually be worth.
What Semel didn't know was that the startup CEO hadn't really wanted to sell his company. But he'd told his board that if anyone ever offered $1 billion, he would take it.
So, when Yahoo had offered $1 billion, it had effectively called the startup CEO's bluff with his board. The deal was going to get done.
But as soon as Semel offered $850 million, the startup CEO took the opportunity to back out of the deal entirely.
And that's how, in an effort to save $150 million, Yahoo lost out on a company now worth $150 billion.
The CEO who turned down $850 million, but would have taken $1 billion?
The lesson here is not that Facebook will avoid Yahoo's fate because it is willing to make huge acquisitions.
Yahoo made plenty of huge acquisitions including Geocities and Broadcast.com.
The lesson Zuckerberg seems to have learned from Semel is that when he has already decided to make a huge acquisition, he isn't going to lose the deal over some amount of money that is a tiny fraction of that startup's future value.
He knows that in the technology business, acquisitions have a binary outcome: They either save you from your innovator's dilemma or they don't.