What does Yahoo! bring to Verizon?

By Edwin Yapp July 27, 2016

End of an era for Yahoo! as pioneer sells its web assets
Deal brokered to shore up ad business, but challenges await

What does Yahoo! bring to Verizon? SO the worst-kept secret of mega technology acquisition deal these past three months has finally materialised: On July 26, telecommunications giant Verizon Communications Inc confirmed it would buy Yahoo! Inc's core Internet properties for US$4.83 billion in cash, after months of behind-the-scenes wheeling and dealing.

Business news portal Bloomberg first reported that the deal was close to completion on July 22, a cue that was picked up by others.

Verizon said the sale does not include Yahoo!’s cash, its shares in Alibaba Group Holdings, its shares in Yahoo! Japan, it’s convertible notes, certain minority investments, nor its non-core patents (the so-called Excalibur portfolio).

These assets will continue to be held by Yahoo!, which will change its name at the deal’s closing and become a registered, publicly traded investment company. Yahoo! will provide additional information about the investment company at a future date, it said in a statement.

“We have enormous respect for what Yahoo! has accomplished; this transaction is about unleashing Yahoo’s full potential, building upon our collective synergies, and strengthening and accelerating that growth,” AOL Inc chief executive officer (CEO) Tim Armstrong said on July 25.

“Combining Verizon, AOL and Yahoo! will create a new powerful competitive rival in mobile media, and an open, scaled alternative offering for advertisers and publishers,” he added.

Verizon had acquired AOL last year for US$4.4 billion.

How we got here

The acquisition by Verizon marks the end of an era of one of the world’s most iconic web pioneer and dotcom bust survivors, which despite going through many a turmoil over the course of its history as an independent web player, has managed to survive 22 years.

Founded by Stanford University students Jerry Yang (pic) and David Filo in 1994, Yahoo! first started out as a personal project that was aimed at indexing websites that were in existence at the time, in a hierarchal manner rather than as a list of searchable index pages.

The site started out as “Jerry and David's Guide to the World Wide Web” but eventually received the moniker Yahoo! – which is actually an acronym for “Yet Another Hierarchical Officious Oracle.”

Yang and Filo subsequently added other features including web searches, email, as well as a web portal, a novel concept at that time in which people would use Yahoo! as an on-ramp to do all things digital with their lives.

This led to Yahoo! becoming one of the most visited websites at the time, and that attracted companies which wanted the precious eyeballs so that they could advertise and reach their audiences.

But as Yahoo! grew into a giant, so did its sprawling mesh of content, features and services. Many believed that it also rested on its laurels, stopped innovating, and was blindsided by the disruption ahead in the form of Google and Facebook.

Also, its belief that it had the monopoly of content began to unravel as a result of the rise of these two latter giants.

While Google was solely focused on search advertising and improving its services – imbuing stickiness and loyalty with users – with its vast suite of user-friendly software, Facebook was busy creating a new genre on the Web by re-imagining how people would want to interact with others, instead of the traditional portal.

With the rise in smartphones, the two companies also focused on mobile, something which Yahoo! was late in doing.

Yahoo!’s prominence began to diminish but Yang, who by then had re-taken over the company once again as CEO in 2007, had an overly optimistic valuation of his company, culminating in an incredible rejection of a US$44.6 billion takeover bid by Microsoft Corp in 2008, which angered many of Yahoo!’s shareholders at the time.

Yang was eventually forced out of Yahoo! a year after that, and four years later completely severed ties with the company he had founded. His replacements, including Carol Bartz and Scott Thompson, did nothing for Yahoo! as the company continued to struggle.

Hopes were revived when the company hired then high-flying Google pioneering executive Marissa Mayer as CEO in 2012, with her mandate to turn things around.

Four years later, that move had also proven futile, even though Mayer spent millions of dollars in revamping and acquisition costs to try and revive the company.

Among the things she tried was to make Yahoo!’s search great again; developing original video content by hiring TV anchor Katie Couric and dabbling with digital magazines (both efforts failed); and buying micro blogging network Tumblr, which has since seen a massive decline in popularity.

Last year, Yahoo! explored the possibility of selling off its highly prized asset – its 40% stake in Alibaba, which it had bought in 2005 for US$1 billion.

Despite Alibaba going public in 2014, Yahoo! still owned a significant chunk of about 15%, valued at about US$32 billion. But the deal didn’t go through, largely due to the fact that a sale would incur a huge tax.

With pressure to turn things around still weighing on Mayer, the company continued to perform badly, raking in only about US$1 billion in the fourth quarter (Q4) of 2014, 15% lower than the same period the year before, reported The Wall Street Journal (subscription required). Yahoo! also announced headcount cuts of about 15%.

Eventually, activist investors led by Starboard Value LP lost faith in Mayer and pushed for the sale of Yahoo!’s core assets in content, advertising and technology tools.

The leading contenders then included AT&T Inc; a group led by Quicken Loans founder Dan Gilbert and backed by billionaire Warren Buffett; private equity firm TPG Capital Management LP; and a consortium of buyout firms Vector Capital and Sycamore Partners.

As of the time of writing, Mayer’s position in Yahoo! was still unclear although she has expressed interest in staying, telling the The New York Times, “I plan to stay. I love Yahoo! and I want to see it into its next chapter.”

The issue however isn’t up to her as NYT also noted that AOL’s CEO Armstrong has said no decision has been made about her as yet. If Mayer is terminated however, she could expect a severance windfall of about US$57 million, the news daily added.

Other signs that her departure is imminent is the fact that the new AOL-Yahoo! unit will not be headed by Mayer but instead by Marni Walden, head of product innovation and new business at Verizon, reports Reuters, and that there is no decision yet on who forms the new senior management team.

What the deal brings

Verizon’s decision to buy Yahoo! is based on it bolstering its future in advertising and diversifying away from its core telco business.

According to Technology Business Research (TBR), Verizon’s current revenue from its wireless and wired business remains healthy going into 2016, but continued revenue growth remains contingent on its fibre optic Internet service and higher wireless equipment sales.

“Verizon generated US$882 million in revenue from AOL in Q4 2015 and TBR anticipates the business will become a more significant revenue stream in 2016 as AOL’s advertising technology is integrated more deeply into Verizon’s growing go90 mobile video service,” said TBR research analyst Steve Vachon.

But to dive deeper into the impact of the Verizon-Yahoo! deal, it’s important to go back to why it bought AOL last year.

Firstly, the way forward for Verizon can’t be to continue acquiring other telcos, as industry observers have noted that the US Federal Communications Commission (FCC) isn’t in favour of letting more mergers happen because such moves are anti-competitive.

Secondly, consumers in developed markets already have the best coverage, speeds and basic connectivity, so much so that they now demand more than merely these given features.

Consequently, operators such as Verizon need to provide value-add in terms of digital platforms for customers to consume more bandwidth-hungry content, driven by the likes of virtual and augmented reality and high-definition audio/video.

Analysts have argued that buying Yahoo!’s assets is a good synergistic move by Verizon as it seeks to integrate what it already has from its AOL acquisition with Yahoo!’s technology.

They are also optimistic that Yahoo!’s users – nearly one billion active users per month – would be a good audience for Verizon’s advertising and content play.

Forrester Research principal analyst Shar VanBoskirk argued that a combined Verizon-Yahoo! makes a lot of sense as “Verizon wants Yahoo to fill out its omnichannel content and advertising play.”

“For all the wobbliness of Yahoo!'s brand identity, the brand still holds a lot of consumer-affinity [as] consumers [still] like the Yahoo brand,” she said in a blog.

VanBoskirk believes that Yahoo!’s most valuable parts are its data assets rather than its content, as some have suggested.

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

“This allows Verizon to create better ad products which are competitive against primarily online giants such as Google and [Facebook], and creates a better user experience which is competitive against other cable and telecom providers,” he said.

Not so straightforward

Despite this seemingly well laid-out strategy, success for Verizon-AOL-Yahoo! isn’t a given as there is still much work to be done. Simply having Yahoo!’s online content and advertising assets, as well as its millions of users, isn’t enough.

People today are frankly quite tired of ads that are often intrusive and have no relevance to them whatsoever.

The key for success therefore is to really target ads to people when and where they need them.

This is where contextualisation and relevance come into play, using advanced data analytics, location data, search and other mined preferences collated from the collective databases of Verizon, AOL and Yahoo!.

This is what Verizon must get right immediately, and to constantly improve, refine and better itself for a long time to come, if it wants to capture a slice of the lucrative digital ad marketplace and upstage leaders Google and Facebook.

Then there is the issue of whether or not advertisers would prefer a third option to Google and Facebook for their advertising needs.

What does Yahoo! bring to Verizon? Mayer (pic) seems to think so, saying in a call with investors following the announcement, “What we see here, at first blush, is a lot of scale, a lot of reach, a great alternative for advertisers from the other leading platforms.”

This was an argument that was disputed by Erin Griffith of Fortune, interestingly enough.

But even with AOL and Yahoo!, Verizon would still be far behind Google and Facebook. Citing data from research firm eMarketer, Reuters noted that Yahoo! is expected to generate only US$2.32 billion in net US digital ad sales, while AOL is expected to make US$1.3 billion in 2016.

Facebook and Google are forecast to deliver sales of US$10.3 billion and US$24.63 billion, respectively, by the end of the year.

Finally, there are the usual challenges of mega-mergers. Forrester Research principal analyst Dan Bieler suggested that Verizon rethink Yahoo!’s place in its new businesses organisation.

“Yahoo! and its sub-brands will not automatically slot into Verizon’s digital life portfolio, which comprises AOL and its sub-brands,” he argued.

“Apart from any cultural integration challenges, mobile must become an even greater focus area and product innovation cycles must speed up,” he added.

Bieler also said it’s not clear what the deal means for Yahoo!’s international activities. He pointed out that if Verizon ultimately decides to exit from Yahoo!’s international activities, Yahoo!’s appeal as an advertising platform will decrease amongst marketers looking for online platforms capable of delivering a “global but local” pitch.