Verizon-Yahoo deal shows shifting of focus to digital

Verizon CEO
Yahoo has sold its digital properties to Verizon for $4.8 billion in cash, showing the importance of digital content for telecom network operators.

Verizon CEO Lowell McAdam said: “Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.”

Several analysts welcomed the move of Verizon in order to strengthen its digital presence and make money from advertising business.

“A combined Verizon-Yahoo makes a lot of sense as Verizon wants Yahoo to fill out its omnichannel content and advertising play,” said Shar VanBoskirk, principal analyst, CMO strategy, at Forrester.

The Yahoo brand still holds a lot of consumer-affinity. Depending on how Verizon plans to leverage that, it could be a nice boost in an industry like telecom where most subscribers disdain even the providers they are quite loyal to.

Yahoo is most valuable in parts, and frankly the parts that are the most valuable are its data assets, not its existing content as some other analysts have suggested.

“The more access to customer data Verizon has — online through Yahoo and AOL, in home via cable boxes, on mobile via smart devices — the more targeted it can be with advertising and sponsored content or product placements across those same devices,” VanBoskirk explained.

This allows Verizon to create better ad products which is competitive against primarily online giants such as Google, and creates a better user experience which is competitive against other cable and telecom providers.

Dan Bieler, principal analyst, enterprise telecoms, at Forrester, said: “Verizon needs to rethink Yahoo’s place in its New Businesses organization. Yahoo and its sub-brands will not automatically slot into Verizon’s digital life portfolio, which comprises AOL and its sub-brands. Apart from any cultural integration challenges, mobile must become an even greater focus area and product innovation cycles must speed up.

It is not clear what the deal means for Yahoo’s international activities. If Verizon ultimately decides to exit from Yahoo’s international activities, Yahoo’s appeal as advertising platform will decrease amongst marketers looking for online platforms capable of delivering a global pitch.

John Colley, professor of Practice in the Strategy & International Business group at Warwick Business School, said: “If you are not in the top two then unless you have a credible niche you will suffer. Yahoo struggled to gain traction and recent results have been particularly disappointing. Why should Verizon and the addition of AOL change that?”

“Yahoo has struggled against the strength of network effects for a long time despite the various promises of CEOs. It is difficult to see how this merger will change that and indeed how Verizon will benefit from this acquisition,” John Colley said.

John Colley said that this is quite a major diversification from mobile telecommunications and it is not clear what benefits may arise from owning both as they are such different businesses. The mobile telecoms industry is maturing and this acquisition appears to be more about finding future growth in unrelated diversification, always a high risk path.

The acquisition also appears to be motivated by AOL’s CEO Tim Armstrong who is seen by some as more likely to be successful running Yahoo than its current CEO Marissa Mayer who has been under pressure from investors for failing to ‘stop the rot’ at Yahoo.

Vishal Tripathi, research director at global market consultancy firm Gartner, said that the Yahoo acquisition will lead Verizon to spruce up its operations post-AOL acquisition but now more into the profitable digital ad space. Verizon will surely monetize the whole operations sooner to get the best out of this deal.

Barclays said last month Verizon could save $500 million a year in costs of acquiring internet traffic and other expenses by buying Yahoo’s internet business. The deal likely means more investment in popular content sites such as AOL’s Huffington Post and Yahoo Finance when they become part of a much larger entity.

“It now becomes somewhat easier to justify investing in content,” said Brian Wieser, an analyst at Pivotal Research.

Yahoo is one of the largest properties on the internet, with hundreds of millions of customers using its email, finance and sports offerings, among others, and a heavily trafficked home page.

But Google has a stranglehold on the internet search business and built an industry-leading email service, while Facebook dominates in mobile and social media. Meanwhile, traditional web banner advertising, long Yahoo’s strength, has become much less lucrative in the age of mobile and video.

“It’s a decade of mismanagement that has finally ended for Yahoo. It’s the continuation of an extension of Verizon’s strategy toward becoming a wireless internet player and a move away from (telecom) regulation for Verizon into an unregulated growth industry,” said Recon Analytics analyst Roger Entner.

“We think greater focus on digital advertising / acquiring content will be a long term positive as it will help diversify Verizon’s revenue from the more commoditized, utility-oriented wireless / wireline subscriber business,” said S&P Global’s Anthony Zino.

“We believe the deal enhances Verizon’s value proposition and scale within the mobile media space, as we note over 1B monthly active users (600M mobile) and attractive brands. We think greater focus on digital advertising / acquiring content will be a long term positive as it will help diversify VZ’s revenue from the more commoditized, utility-oriented wireless / wireline subscriber business,” said UBS’s Jonathan Hodulik.

“We have less of an issue in how the company is going about building a digital media/advertising company, but rather we question if in fact building a digital media/advertising company is the right move for Verizon,” said Cowen & Co.’s Colby Synesael.

In addition to Facebook and Google, Verizon will need to contend with other enterprise technology vendors.

“Agencies and publishers are increasingly wary of Facebook’s and Google’s stronghold on the $185 billion digital ad ecosystem, which creates opportunities for a Verizon-owned digital ad platform,” said Seth Ulinski, senior analyst at TBR.

Although Verizon executives made it known Google and Facebook are the company’s primary competitors, other technology vendors represent formidable adversaries against which Verizon will compete either directly or indirectly.

Launched in 2Q16, SAP Exchange Media is establishing a programmatic ad exchange that connects buyers and sellers of media, similar to ad tech assets acquired by Yahoo (e.g., BrightRoll Exchange) and AOL (e.g., Adap.tv).

After purchasing BlueKai in 1Q14 for an estimated $400 million, Oracle split the business into a data management platform (DMP), operating in Oracle Marketing Cloud, and a data exchange, operating in Oracle Data Cloud. Data assets of Yahoo paired with the DMP within the AOL One technology stack could present audience buying alternatives.

Despite outsourcing non-Bing ad sales to AOL last year, Microsoft’s acquisition of LinkedIn for $26.2 billion in 3Q16 and equity stake in programmatic specialist AppNexus make Microsoft another competitor for Verizon. With the LinkedIn acquisition, Microsoft has a base of 300 million people to whom it can advertise and serve with software.

Verizon rivals such as T-Mobile, Sprint and AT&T are yet to respond to the company’s $4.8 billion cash deal to buy Yahoo.

Latest

More like this
Related

AT&T faces scrutiny over cybersecurity spending following data breach impacting 109 mn

Telecom operator AT&T has disclosed a significant data breach...

TPG Telecom and Optus network sharing deal faces review in Australia

Australia’s competition watchdog, the Australian Competition and Consumer Commission...

Telecoms handle energy costs focusing on sustainability

European telecoms are adopting green initiatives and investing in...

Smartphone display trends and consumer buying patterns

Analysts at research firms have revealed the latest growth...