Why a Verizon Bid on Yahoo Makes Sense

Yahoo goes on sale today. While the company’s immediate fate may have no short-term implications on the channel, the sale is attracting a lot of interest from analysts and experts who have plenty of thoughts on what Yahoo’s demise says about the changing nature of the digital market.

Books can—and will—be written on where Marissa Meyer and Yahoo’s leadership went wrong and how they managed to drag a once-great Internet company into irrelevance. Today, all eyes are focused on who will actually be bidding on Yahoo’s core web business. Many expect that Verizon will be a frontrunner, but others could make a last-minute appeal. You may wonder why would it make sense for a telecom giant to acquire a struggling content platform. More importantly, what lessons can channel companies learn from Yahoo’s fall-from-grace?

Here are some insights.

Yahoo’s Good Ol’ Days Are Over

Yahoo has been a staple of the Internet Era since its founding in 1994. Over the years, it has managed sites such as Yahoo Finance, Tumblr and Flickr that have become Internet staples. In fact, Yahoo sites are the third-most trafficked on the Internet, according to the measurement company comScore.

Yahoo is still generating revenue, just not enough to stay competitive. According to eMarketer, Yahoo is expected to capture more than $2.6 billion in worldwide digital ad sales, a figure that’s tiny compared with its main competitors. The amount that Yahoo collects equates to just 1.5 percent of the online ad market. Together, Google and Facebook control 40 percent. For many reasons, Yahoo never glommed onto the advanced targeted advertising algorithms of its two giant competitors despite being on the forefront of such annoying advertising gimmicks such as pop up ads.

Part of Yahoo’s troubles can be traced to its diversification strategy. Despite some major investments in content such as the Tumblr and Flickr platforms, and original programming (among other things the company hired former NBC personality Katie Couric to produce news), much of the company’s focus has been on search, a market thoroughly dominated by Google. Google has nearly 65 percent of the search market, while Microsoft Bing has much of the rest. Though Yahoo’s search platform maintains a solid third place, that doesn’t translate into much revenue, influence or opportunity. The pool of potential bidders reflects that.

Why Verizon Makes Sense

Verizon looks to be the frontrunner in the final hours leading up to the deadline for interested parties to submit bids. (Other rumored bidders for Yahoo such as AT&T, Comcast, Time, IAC and Google have reportedly dropped out of the process.)

Verizon is experiencing some growing pains recently as it attempts to remake itself into a major player in the digital sphere. Two unions representing nearly 40,000 employees of its legacy landline business began a strike last Wednesday after 10 months of contract negotiations. What is more, Verizon just closed on the sale of its California, Texas and Florida assets as it moves ever more firmly into its wireless business, which comprised 70 percent of its revenue last year.

Verizon’s interest in Yahoo speaks to a market shift in telecom. Today, no carrier has a clear differentiation in service. As a result, telecom companies distinguish themselves around price, which results in low margins. Verizon Wireless has won that race; it leads the pack in number of subscribers with roughly 112 million. But most of those subscribers have made the transition to smartphones with data plans, and Verizon is stuck competing only by lowering prices and further shrinking its slim margins unless it can find new services to offer customers.

Users are accessing content via mobile devices at unprecedented rates. Verizon has a large subscriber base and a clear, mature delivery framework. If it wants to compete with giants like Facebook and Google, it needs content to deliver and data to help target users. That’s why it purchased AOL for $4.4 billion and ad tech firm Millennial Media for $250 million last year.

A Yahoo acquisition could allow Verizon to offer unique programming with significant price advantages and better compete against AT&T, which is integrating new video capabilities that it acquired when it bought DirecTV for $48.5 billion. A combined AOL/Yahoo digital advertising platform could position Verizon to compete with the big dogs in terms of video ads and apps. Yahoo could bring Verizon both the data generated by the 1 billion users of its mail, finance, sports and video sites as well as a platform to deliver video to Verizon subscribers.

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SOURCE: The VAR Guy