Oh, how the '90s have fallen. In its second purchase of an iconic mid-1990s Internet company, Verizon will soon buy Yahoo, according to Bloomberg, wrapping it up with AOL into an even bigger bundle of financially failed Internet content sadness.
I don't have an opinion on the financial sense of this deal. Smarter financial minds say that all of Yahoo's actual financial value consists of Yahoo Japan and its stake in Chinese e-commerce site Alibaba, meaning that all of the Web services, content, and advertising elements we see here in the US are worth less than zero.
The deal is more meaningful because it makes Verizon's post-saturation growth strategy clear. We've reached a point in America where everyone who wants a cell phone has a cell phone. That's called saturation. If they don't develop new businesses, the wireless carriers will only be able to make money by raising prices or stealing customers from each other. Cable companies came to this state a while ago, so they keep merging and raising prices. But the US government, at least under Obama for now, has said that the four major wireless carriers can't merge, so they need to get more creative.
Sprint and T-Mobile, each half the size of Verizon, can grow by picking off the weak subscribers from AT&T and Verizon. But the two bigger carriers need other ideas. AT&T's strategy, for a few years now, has been to become the default carrier for cars, home security systems, and other non-phone devices. This is super smart because those devices have high purchase or installation costs and, if carrier-locked or designed for only one carrier, are very difficult to switch between carriers. They become very sticky users.
Verizon's plan seems to focus on becoming a content and advertising company. It'll offer preferred access to its 120 million wireless subscribers and its millions of DSL and FiOS subscribers through its own ad products, and it'll let those advertisers reach other users through its content sites. Meanwhile, it will harvest massive amounts of user behavior data to better target more ads and content. This isn't much different from Google's and Facebook's strategies, and they're hugely successful.
Yahoo adds some meat to Verizon's ad sandwich. According to eMarketer, Verizon had about $1.33 billion in ad revenue last year to Yahoo's $3.28 billion. (Google had $53 billion.) Bloomberg says the company has 200 million visitors of various sorts. Yahoo's revenue is on the decline, according to eMarketer, so presumably Verizon thinks it can turn things around through better management.
With its huge, semi-captive audience, making money through becoming an advertising platform may be a good idea for Verizon. But Verizon's attempts to branch out into content have fallen really flat. Other than letting AOL's existing websites, such as Engadget, just plug along (and Engadget's site ranking has been going down for the past year, according to Alexa), the company's biggest new content offering has been a streaming service called "go90," which even Verizon admitted was "overhyped."
The Danger of an ISP/Advertising Platform
Does this approach endanger the free and open Internet? Of course it does. Any unholy combination between service provider and content offering means that the service provider may prefer its content offering over that of others. This doesn't mean Verizon would damage Google or Facebook access—users want those sites too intensely—but maybe just that smaller ad providers and content networks wouldn't get priority or very good customer service from a carrier incentivized to promote its own products. Yes, users can switch wireless carriers, but smothering other ad networks and upstart content providers wouldn't necessarily be obvious to end users.
Verizon has come out in support of basic net neutrality principles, pointing out that since it owns AOL, getting into a blocking-and-throttling war with other network providers would damage its own content sites. But the regulators need to keep a close eye on this Yahoo transaction, and on Verizon's business going forward, because there are sneakier ways to slowly suffocate competing ad providers—especially when your company's new strategy seems to be to become an advertising powerhouse.