26 Jul 2016 19:06 IST

Verizon's acquisition of Yahoo! makes little sense

The acquisition of another has-been, à la AOL, is not likely to help Verizon going forward

Yahoo has a new owner. Verizon Communications, America’s largest wireless carrier, agreed to acquire the venerable brand for $5 billion.

On the face of it, it looks like a good deal for both companies. Verizon has a legacy dating back to the old wireline phone business, when landlines and payphones were the way to communicate. The company was formed in 2000, when Bell Atlantic Corp. merged with GTE Corp. to solidify the local phone business. Mobile phones were still entering the American market scene at the time and Verizon made a huge bet on building out its wireless footprint by selling primarily to business customers. Extracting a premium but delivering on call quality, Verizon quietly became America’s No.1 ranked wireless carrier. It is also the most profitable telecom company.

Yahoo, on the other hand is a global brand with nearly one billion total users a month — the majority of them outside the US. Yahoo Mail has 280 million users worldwide. With email addresses uniquely identifying people these days, much like a mobile or PAN number, it is unlikely that a Yahoo email user will switch to a different service provider. The switching cost is too high and this fact surely was in Verizon’s consideration when the offer was made.

Staying relevant

But Yahoo has been in trouble for a number of years now. An early pioneer in search, portals and e-mail, Yahoo sat by silently, watching cross town rivals Google and Facebook slowly dominate the internet. In today’s business models, success is measured by how long users stay on your site. For many around the world, the very first page that loads when the web browser starts up is the Google homepage or Facebook or YouTube. Even if Yahoo Mail is the first destination, most users leave the site to go to its competitors for search, social media or video. When the user mindshare of your site is falling, it is an indication that your site has lost its original lustre.

Then, there’s the mobile platform. Yahoo completely missed out on opportunities to expand into mobile, even as Google asserted global dominance through its vaunted Android OS; a counter punch to another tech rival Apple. Even Facebook, a late entrant to mobile, got its act together, and today, is a powerful player in this domain.

Yahoo’s core asset, therefore, was no longer the outstanding digital business it had built in the late 1990s. Ironically, the crown jewel remains Yahoo’s investment stake in China’s Alibaba, which was purely a defensive ploy when Alibaba was growing with its own teething problems. (The Verizon deal does not include the Alibaba stake.)

Meanwhile, all the way across the country on the East Coast, Verizon was looking for ways to grow. There are only so many new mobile customers it could get. It invested heavily in fibre to deliver internet to homes and businesses, thus retiring its old DSL offering. But this move ended up cannibalising its landline phone business as high internet speeds made it possible for customers to make cheap Voice Over IP calls. Verizon then paid billions to become a TV service provider through its FIOS service. But this too proved to be ineffective as many Americans, wary of high cable TV rates — especially millennials, who are used to watching everything on demand — are cutting the cord entirely. Add to this FIOS’ unbelievably stodgy and clumsy user interface for its video library, when compared to the likes of Netflix or YouTube. Finally, with free mobile calls possible on WiFi using WhatsApp, Google Hangouts and Skype, Verizon saw its mobile business flattening out too.

Resurrecting AOL

In a desperate move to stay relevant, Verizon, in 2015, acquired AOL. AO what? Yes, another early internet pioneer, America Online (AOL), a company which became famous for offering internet access on dial up modems — was dying a slow death until Verizon paid $4.4 billion to resurrect it. The thinking was that Verizon could get into the hot world of digital advertising.

The strategy gurus at Verizon must have thought about this long and hard. By paying $9.4 billion for two also-rans in the internet business, they convinced the Verizon board that this was the only way for Verizon to compete with the big four — Microsoft, Apple, Google and Facebook.

But neither AOL nor Yahoo are strong in digital mobile advertising, the hottest growth area today. Each of Yahoo’s core products — News, Mail, Finance, Sports, Search and Messenger — has identical parallels to AOL’s offerings, so Verizon is getting nothing new. Who gets news through the AOL portal these days, anyway? Most of us get our updates through Google news, dedicated RSS feeds, or on social media.

The brand

In an interview with Bloomberg, Jonathan Chaplin, an analyst with New Street Research LLC, summed it up best. “The idea that buying Yahoo somehow positions Verizon to compete against Google and Facebook is laughable. Unlike its superiority as a wireless carrier, its Yahoo and AOL businesses are the complete opposite. There are no barriers to entry and it is extremely fragmented and competitive.”

Some may argue that buying Yahoo will strengthen Verizon’s brand. But this is not a strong consideration either, because most people outside of America have never heard of either Verizon or AOL; and outside America is where most of Yahoo’s users are. Verizon will obviously have to retain the Yahoo brand and the Yahoo domain. It cannot go around the world asking customers to switch from username@yahoo.com to username@verizon.com.

I must be missing something here, or this is an incredibly dumb deal. Time alone will tell.

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