What Does Verizon Want With Yahoo?
When you’re the 15th biggest business in the U.S., you don’t need to execute deal gymnastics like the Reverse Morris. Verizon can leave that tactic to others (like Cerberus-controlled YP Holdings, which may use the technique as it teams with Goldman Sachs to pursue Yahoo) as it bids for Yahoo’s core assets this week.
Final bidding competition appeared to emerge Tuesday, as the first bids came in. Reports identified a field composed of YP Holdings; Verizon; private equity firm TPG; and a team that brings together Bain Capital and former interim Yahoo CEO Ross Levinsohn.
Though as many as 40 suitors were reported to be lined up for bidding on Yahoo core assets — its Yahoo Finance, Yahoo Sports, Yahoo news and other media properties, and not its Asian investments — most peeled away.
The appetite for turnaround (POLITICO: “Yahoo: Who’s ready to take on a legacy digital-native media turnaround?“) apparently was ruined for some by the magnitude of the work ahead.
First published at Politico Media
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Each remaining bidder offers a different flavor of intrigue, with rumored front-runner perhaps the most watchable for now.
For Verizon, it’s a matter of putting ever more distance between the 21st century company it is striving to become and the old dumb, landline phone company of 19th century origin from which it sprang.
For Verizon, a Yahoo acquisition means a big bet on two things — scale, and data — and the two, of course, are inextricably linked. It is Yahoo’s huge Comscore-counted audience of 206 million monthly unique visitors that has energized Verizon’s interest. The fact that the audience shows a decline of six percent comparing March 2016 to March 2015, according to Comscore, must send a chill down the would-be buyers’ spine as it determines how much it is willing to pay for the would-be prize.
As bidding narrows, the company will place a dollar bet here — believing that AOL CEO Tim Armstrong’s well-hyped ad machine, the key to Verizon’s $4.4 billion purchase of AOL a year ago — can better monetize that Yahoo audience than Yahoo CEO Marissa Mayer (or her legion of predecessors) could. And it will place a value on its harder-to-assess strategic financial bet as well, as CEO Lowell McAdam aims to remake this company as a growth company fully embracing the digital economy.
By several accounts, Yahoo is being less than open-booked on its financials, making a determination of the financial value of its audience more opaque than someone spending upwards of $4 billion would likely expect.
A telecom company with a media quest
Make no mistake: Today, Verizon is still a phone company, though 70% of its revenues are onthe new side of the business, “wireless,” as it bought out its partner Vodafone to take full control of Verizon Wireless two years ago. Its core business includes broadband and TV programming, of course, but both of those businesses can claim customers only in single-digit millions, while more than 112 million form the wireless client base.
Verizon, despite its acquisition of AOL last year, still is profoundly a communications company, with wannabe media company revenue added in. We can figure that AOL generates less than two percent of Verizon’s revenues. Even with Yahoo’s (fast declining, at a 11.6% clip in Tuesday’s released first-quarter financials) revenues added in, media would account for no more than five percent of Verizon’s overall income.
In all of its core communications businesses, Verizon faces maturing markets, and its own disruptors, like T-Mobile, which is causing it lots of headaches. In fact, in data released Tuesday, Verizon lags all is major rivals in wireless customer growth. That smartphone business is more about upgrade and takeaway than new customer growth. Its landline business, of course, is becoming material for museums and period movies. Those who want broadband largely already have it.
So, Verizon, in search of future growth, has turned its eyes to digital media. Last year, it surprised many by paying out billions of dollars for AOL/Huffington Post. CEO Tim Armstrong had resuscitated that company. He pumped up its marketability, focusing intensely on the magic words that investors now associate with Internet promise: mobile, video and programmatic advertising.
Verizon bought that promise, and the company. Now, adding Yahoo’s vast audience, and user data, doubles down on the theory. Its bid comes at an unusual moment. Given the growing Google–Facebook dominance of national and global digital markets, an advantage only growing as usage has moved markedly from desktop to smartphone, fear is alive in the non-Google, non-Facebook part of the market.
Just in the last month, we’ve seen significant pullbacks among the largest digital news startups, and a recalibration of current and future growth plans. Major digital media investors tell me plainly, if confidentially, that their focus is on consolidation of current investments, rather than new forays.
Verizon, then, plans to increase its presence in a market that has been recently been clouded by doubt. That doubt could be transient — or represent a chill in the digital media ad market that could significantly lower the value of such businesses as Yahoo. Yahoo, in reporting its own first quarter results on Tuesday, greatly reinforces that doubt. Its revenue decline now exceeds that of beleaguered daily newspapers, at 11%. Further, it reported a net loss of $99 million, compared to net gain of $21 million one year earlier.
What is Verizon’s game?
Given Yahoo’s southerly trajectory what’s Verizon’s game then? With whom does it see itself competing with this new media-empowered look? Those are the big questions behind its bid, and the price it is willing to pay. While that price has been estimated as high as $8 billion, Tuesday’s results, and widening fears about the future robustness of the digital ad economy, will likely dampen it well.
Does Verizon believe that its bigger scale — combining, in some form Yahoo’s 206 million users with AOL’s 175 million (most duplicated) — might allow it to compete on the same battlefields as Google and Facebook for digital ad money?
Would a buy be more of a video play, for more subscription and pay-per-view money? That would place it in competition with Amazon, and its new monthly Prime entertainment pricing, and, of course, Netflix. That go-go company has beaten Verizon to the punchbowl — and it’s starting to stare down a more mature domestic market, now counting 45.7 million subscribers.
Or this as much a defensive play, distancing from its cohort of former pipes companies — ATT, Comcast, Charter/Time Warner — each and all the product of consolidation and each and all now searching for their own modern identities and business strategies in that same tough landscape Verizon faces?
Is the strategy a clear one, or a hybrid one? Verizon leadership will acknowledge that the company isn’t a platform-based one, like digital ad leaders Google and Facebook, or like most of the rest of the eight companies in the Top 10 in U.S. digital ad revenue.
What else may support Verizon’s strategy?
Think TV — the new TV. Programmatic buying is moving into the TV business, slowly, but surely. Digital ad veteran Dave Morgan’s Simulmedia is one leader here, but Verizon is catching up to the programmatic TV promise. Today, it can’t easily sell both audience-based digital ads and TV ads across its network, but it soon will have that capability.
Digital ad entrepreneur Bill Wise is one who believes the next pot of digital ad money is indeed now found in TV. Wise, now CEO of MediaOcean, a major ad tech company, built ad exchange Right Media and sold it to Yahoo in 2007 (“I signed a 3 year vesting agreement. Left after 3 years and 1 day,” he says).
“I wrote an article, might be three years ago now, that I said the problem with Yahoo is seven years ago it had Google envy, and then a few years ago, five years ago, it had Facebook envy,” he told me recently.
“You’re not going to beat Google at Google, and you’re not going to beat Facebook at Facebook. So Yahoo was inherently fighting in battles that they couldn’t win. I wrote that Yahoo should be focused on NBC, ABC, Fox, and they should be the next broadcast network. Instead Marissa focused all her efforts on mobile — which I can’t say was wrong because I think now the vast majority of the Yahoo users are going mobile, but Tim [Armstrong] made it about video. The only hope for a Yahoo/AOL merger to drive rates is if they start stealing TV dollars.”
On Tuesday, Recode’s Kara Swisher identified Wise as a member of Ross Levinsohn’s bidding group.
This kind of approach is increasingly based on data science — as are most Verizon ad selling strategies — or, its application: business intelligence. All the major media-oriented companies that plan a big beyond-2020 presence now tell me that such intelligence is moving to the center of their strategies. For Verizon, that means matching up profiles — gained through those 113 million wireless subscribers — with all kinds of data on AOL- and Yahoo-using readers and viewers. We can see the potential market power ahead there.
Further, Verizon appears to know some of what it doesn’t know. It is partnering with those who know the media business better than it does, to gain both knowledge and leverage. Just this week, it announced an expansion of a joint effort to build out Millennials-oriented digital video channels agreement with Hearst, a company that quietly leads the way in numerous newer media areas.
The shape-shifting imperative: Verizon, courtesy of $21.2 billion in free cash flow, boasts a luxury that most others in and around media don’t: time. It can afford to test, experiment and integrate, and make inevitable mistakes.
In this whole process, Verizon is attempting to pull off a corporate shapeshift. That’s most akin to what Comcast, in buying NBCU, and then further investing in digital start-ups like Buzzfeed and Vox Media, is trying to do. Both are trying to graft media DNA onto their aging trunks.
That movement is an unprecedented one, largely confined to the U.S., European media analyst Gregor Waller told me.
“The real competition in Europe is between wireless telcos that have (in parallel) invested into broadband — broadband infrastructure only, without content — and cable-companies that offer broadband plus content. But I do not see any competitor aspiring to own wireless + broadband + content.”
Ironically, Yahoo itself may offer a revelation for Verizon here. After all, Yahoo was birthed as a web organizer, not a media company, and it never figured out how to make that transition. Yahoo’s tale could be a cautionary tale for Verizon, and Comcast, though 2016 offers an almost wholly changed landscape from a decade and more ago, when Yahoo tried to grow into something it couldn’t.
Even for deep-pocketed Verizon, though, it will be a steep ascent into media. That Verizon name, created in 2000 as Bell Atlantic and GTE merged, means truth on the horizon, borrowing “veritas” from the Latin, we’re told. Perhaps the better root word would be vertigo, which the company may well feel as it attempts its next climb.