July 27, 2016

Five Ways Verizon Wins With Yahoo

SMITH BRAIN TRUST — Verizon’s $4.8 billion cash purchase of Yahoo positions the telecom giant to fulfill its longstanding goal to be a player in online media and advertising, says marketing professor P.K. Kannan at the University of Maryland’s Robert H. Smith School of Business. Verizon, without content or media, has lacked the means to target its 100 million-plus cell phone customers and expand its ad revenue business. “Yahoo with its one billion monthly users is, therefore, a very attractive proposition,” Kannan says.

The hot trend in the online media industry is centered on making consumers — especially on mobile devices — "sticky" and engaged via video and music streaming. “Such engagement translates to ad opportunities and ad dollars,” Kannan says. Seeing Google and Facebook benefit through Verizon-customer devices intensified Verizon’s thirst for this action, he says. Verizon, a longtime smartphone service provider, moved to solve this with its 2015 AOL acquisition. “Verizon got the digital advertising technology, but still lacked an online customer base to target the ads," he says. "Huffington post, owned via the AOL deal, has been the exception.” Now, with its Yahoo acquisition, Verizon stands to benefit in five ways.

1.  The one billion users who frequent Yahoo mail, finance, sports and news content become targets for digital ads through AOL. "Verizon immediately gets eyeballs for its digital ad business, and at a pretty low acquisition cost of just $5 per user,” Kannan says. (Verizon’s $4.8 billion purchase price for 1 billion users compares favorably to Yahoo's $11 per user Tumblr acquisition a few years ago.) Yahoo also paid $1.1 billion for 100 million users worldwide and wrote off $600 million of that valuation a few quarters past.

2. Verizon can sell more cellphone services to these new customers, who become easier to reach and target and lead to reduced acquisition costs. The profitability of cellphone operation goes up if Verizon signs up even some fraction of this user base.

3. Verizon now can preload many of Yahoo's content apps directly on smartphones it sells or rents. These apps include Tumblr, Yahoo Mail, Yahoo News and Yahoo Finance. Verizon further gets access to these users to monitor and track their behavior, collect their data and target them with ads — all of which can be monetized.

4. “Verizon can use Yahoo as a video streaming service with popular content, including from its NFL tie-in, to make Yahoo content and media more sticky,” Kannan says. “It can sell subscriptions for such content and/or use the opportunity sell ads and monetize viewer engagement.”

5.  Verizon can buy a music streaming service and combine it with Yahoo content.

Having this access to a digital platform, “Verizon’s grand plan involves doubling the user base to two billion by 2020 and increasing the ad business from where it is now — fairly small and inconsequential — to something of a competitor to Google and Facebook,” Kannan says.

How does Yahoo Benefit? “Yahoo will retain its name and its 15 percent stake in Alibaba and Yahoo Japan holdings,” Kannan says. “With its core business, losing a lot of money, now divested, Yahoo should benefit by being just an investment holding company.”

Implications for Firm Value and Stock Price

Berkshire Hathaway has given both Yahoo and Verizon a vote of confidence, says David Kass, clinical professor of finance at the Smith School. The evidence lies in Warren Buffett’s offer to be Quicken Loans founder and chairman Dan Gilbert's financing partner in Gilbert's bid for Yahoo in May 2016, he says. “Verizon meanwhile is an approximate $1 billion investment in Berkshire’s portfolio — a likely investment of Buffett’s portfolio managers, Todd Combs and Ted Weschler.” Both Yahoo and Verizon have substantially outperformed the market in 2016, Kass says. “Verizon is currently trading close to its all-time high and it also pays a 4 percent dividend,” he says.

Kannan says even “a few” of the five aforementioned benefits coming to fruition will contribute to Verizon’s firm value. Look for ad revenue to go up, acquisition costs for cellphone customers to go down, and customers becoming sticky and more loyal  all leading to higher lifetime value of the customer base.

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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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