Verizon Communications finally got its long-simmering deal for Yahoo done, capping what has quietly amounted to a buying binge over the past seven months in which the telco has snapped up seven companies for nearly $10 billion in cash and stock amid its pivot toward mobile video and connectivity.
Verizon agreed to buy Yahoo for $4.8 billion, besting some big names among reported early bidders, such as AT&T as well as Quicken Loans founder and Cleveland Cavaliers owner Dan Gilbert. The price reflects how far the once-mighty search company had fallen: In 2008, Yahoo turned down an offer from Microsoft to buy the entire company for $45 billion. Eight years earlier, in 2000, Yahoo had a market capitalization of around $130 billion.
CEO Lowell McAdam’s new focus on mobile video and connectivity has led to the eclectic list of recent acquisitions. They range from digital video content providers like Complex — purchased as part of a joint venture with Hearst Media called Verizon Hearst Media Partners — to fleet management company Fleetmatics.
In a more traditional vein, Verizon also is buying XO Communications’s fiber business for $1.8 billion in a deal that should close in the second half of 2017.
MoffettNathanson principal and senior analyst Craig Moffett said in a research note that the Yahoo deal, especially, signals a change in overall strategy as the wireline business continues to soften.
Verizon lost a net 41,000 Fios TV customers in the second quarter amid a seven-week labor strike, and Fios customer gains overall have been dwindling steadily over the past few quarters. AT&T has also seen its U-verse TV customer losses mount: It subtracted 391,000 video customers in the quarter, more than the 384,000 net subscriber losses in the prior period.
Per Moffett: “The telecom industry is growth-challenged. Both AT&T and Verizon have now reported meaningfully negative organic growth. The Yahoo acquisition must be seen in this light. Verizon is seemingly acknowledging the end of an era; wireless penetration growth is over, and so too, seemingly, is ARPU growth from consumers for whom real disposable income has been stagnant for decades. The monetization of incremental data use through higher consumer ARPUs hasn’t worked out and IoT just doesn’t portend enough carrier revenue to be the next big thing. With this as a backdrop, Verizon is turning to an entirely new source of revenue for the wireless business: advertisers. It will take years to find out if the strategy pans out.”
McAdam, though, told analysts on the July 26 call that Verizon believes these seemingly disparate purchases mesh to form a cohesive strategy focused on bringing video content to younger consumers by any means possible.
The XO Communications buy helps build the foundation: deep fiber assets, such as 40 metro fiber rings in several major cities, will provide a fat pipe for services. The XO deal also includes an agreement to license wireless spectrum that will provide Verizon with a clear path to 5G deployment, which McAdam said he considers “wireless fiber.”
“With wireless fiber, the so-called last mile can be a virtual connection, dramatically changing our cost structure,” McAdam said.
At the core of the so-called video evolution are the changing consumption habits of younger consumers toward mobile and digital content.
“Over the past several years, we have dramatically expanded the ways in which we can deliver content wherever and however the digital customer wants it,” McAdam said. He cited offering large and small bundles of linear content through wireline Fios TV; over-the-top content delivery; online content and publishing and advertising technology via AOL; mobile video content through its go90 offering; and its joint venture with Hearst.
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With the Yahoo, deal, according to McAdam, Verizon is “scaling up to be a major competitor in mobile media.” Yahoo’s portfolio of online properties and mobile applications attract more than 1 billion monthly active consumer views. Yahoo also brings additional online content, through Yahoo Sports, Yahoo Finance, Yahoo News, email through Yahoo Mail and expands the overall company’s analytics and ad-tech capabilities. Verizon’s $4.4 billion purchase of AOL last year brought in such content producers as The Huffington Post, TechCrunch and Engadget.
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