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Jul 26, 2016

With Yahoo Deal, Verizon Sets Sights on Facebook, Google


Verizon Communications Inc. is gunning for Facebook Inc. and Alphabet Inc.’s Google.

Its $4.83 billion deal to acquire Yahoo Inc. announced Monday will allow the nation’s biggest wireless carrier to become a meaningful player in the digital media industry, which could be as large as $180 billion by 2020, CEO Lowell McAdam said.

“Verizon intends to be a significant player in this space,” Mr. McAdam said on a conference call.

The carrier is hoping that pairing Yahoo’s one billion monthly active users with its own 113 million subscribers will create a new growing revenue stream at a time when its core business is slowing. On Tuesday, Verizon reported slowing retail postpaid subscribers and a 5.3% revenue decline for the quarter ended June 30. It was the first quarterly drop in revenue since 2010.

Shares of Verizon fell 1.9% midday to $54.81.

The call with investors Tuesday was the first time Verizon executives directly addressed its rationale for acquiring Yahoo, explaining that some of Yahoo’s most attractive assets were its email, News, Sports and Finance properties.

“Yahoo brings viewers. Viewers bring advertising. Advertising brings top-line growth,” said Verizon Chief Financial Officer Fran Shammo.
Verizon’s thesis for the Yahoo investment is content creators and advertisers are hungry for alternatives beyond Facebook and Google as the market for digital media expands for both in-home and mobile consumption. This year, Google collected an estimated 31% of digital ad revenue globally and Facebook had 12%, according to eMarketer. Yahoo and AOL combined have about 2.2%.

“There’s been a lot made of are we going to challenge Google and Facebook in this process,” Mr. McAdam said. “We’re a small player today relative to them. All we need to do is take more than our fair share of the growth of the market and this will be a success for us.”

Verizon said traditional 300-channel TV bundles are beginning to fray, and more media consumption is moving to smartphones, especially among millennials. Mr. McAdam pointed to how some of its other investments, such as its recent acquisition of Complex magazine and AwesomenesssTV, will help it ride that wave.

Mr. McAdam also said he recently spoke with NFL Commissioner Roger Goodell and NBA Commissioner Adam Silver about ways to expand sports content, including games, on Verizon’s online and mobile properties, such as its mobile video app go90. Mr. McAdam said the carrier is also in talks with broadcast networks about how their sports channels could also be streamed over AOL, Yahoo or go90.

“The big advertisers have come to us saying that they have more ads to place than they have good places to put them,” Mr. McAdam said. “We will be one of the few that can deliver advertising and content across the home, across the mobile device, and across the internet.”

Investing in mobile media will also allow Verizon to draw revenue from a less capital-intensive business, Mr. McAdam said, and one that doesn’t have to deal with a labor union. Verizon spent $7.3 billion in capital expenditures on its networks in the first half of the year, and had to manage a 45-day labor strike.

For the period, Verizon added 615,000 net retail postpaid wireless subscribers, a 46% drop from the prior-year period, while revenue fell to $30.53 billion. Its landline internet and TV business, called Fios, also lost customers, partly due to the wireline strike.

Earnings, meanwhile, took a major hit from one-time remeasurements to Verizon’s pension and postretirement benefits as well as higher costs incurred during the strike. In all, Verizon reported a profit of $702 million, down from $4.23 billion a year earlier.

In recent years, Verizon has offered heavy discounts on tablets as a means of juicing subscriber metrics. This quarter, more than 350,000 of its net additions were tablets, and only 86,000 were phones.

While the departure of more fickle tablet subscribers partly caused monthly cancellations to tick up slightly to 0.94%, it also has the benefit of seeding Verizon’s customer base with a larger screen where they can more comfortably watch its new online content, Mr. Shammo said. About 11% of Verizon’s 113 million retail customers have tablets, he said.

“With go90, AOL, Yahoo coming into the portfolio fold, we are trying to drive more usage and these devices I want those users to consume content, which then ultimately drives advertising,” Mr. Shammo said.

Ryan Knutson

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