Verizon’s Yahoo acquisition raises more questions than answers as to the long term values Verizon will gain from this deal. First, we evaluate what are the strengths and weaknesses of each company. Verizon employs over 178k employees nationally and internationally. It owns and operates many telecommunications facilities from fiber optics, to data centers and radio towers. Its telecommunications engineering management is a key driver to its success. In terms of domestic telecom market, Verizon, as co-leader with AT&T, holds about a 35%-40% of the market share. Yahoo manages about 11k employees. At one time, Yahoo was a leader in its search engine then fell back in its presence to less than 8% of the market. In all likelihood, its infrastructure is limited to data center racks with CDNs.
Yahoo has led a peripatetic strategy since its IPO. Even though it started as a search engine and email tool, it fell into a content acquisition. Now, it vacillated between content origination and acquisitions, most of which led to over $20 billion in losses under Marissa Meyer’s leadership. Somehow it did not achieve what they thought it would create – more traffic.
In my earlier blog, Uberization of ecommerce, I describe how an Internet business achieves its value. If we look at Internet content, look at Youtube. That model allowed users to upload their content. Cost to the host, in this Google, is practically nothing, except for the storage and distribution infrastructure. And it uploads millions of content without paying not one cent for production. Imagine trying to fund every production for every content, as one founder thought would do so years ago.
Some time back, I did work on a content startup. I argued with the co-founder on to originate the content since he was interviewing production companies to develop instructional content. The average production costs would be about $10k. And since the website had to sell its content for pennies or even for free, I questioned whether the company should be in the production business. The company would have incessant negative cash flow while it kept producing countless instructional videos. The best approach was to allow the users to upload the content in the same fashion as Youtube. And we could screen or approve the content based on the quality. It followed the Internet business model to rely on user originated content – emails, videos, blogs, etc. Create quantity and build a business model that relies on pennies on the dollar.
As example, we are seeing the old business model of original content origination being turned upside down in the newspaper business. Old style newspaper-staffed writers and editors and published all sorts of content that would attract consumers from all walks of life. A newspaper would be delivered to distribution points and people picked the front page and other sections of interest. Once printed on paper, there was no turning back. But does this model make any sense in the digital world? No. If someone is interested in obituaries or wedding announcements or finance, search engines play that role. There is no “paper”. And rather charging readers for a fixed price, the pricing model also has to adapt to this new paradigm. It will rely on some advertising revenue, on fractional pennies, directly related to the search engines results and user profiles. Yet, no longer on the fixed price on one newspaper.
And technology allows to you to change pricing on demand (Uber does have that model). Allows the business model to rely on fractional pennies. But always think in terms of volume/quantity.
Now, can a digital company work well with a telecom infrastructure company? There is one interesting example, in Japan, the wireless carrier, DoCoMo. The Japanese wireless carrier has the unusual relationship with digital content providers where, in return for sharing the network, it shares a percentage of the content’s revenues with the carrier. As an added benefit, the monthly user subscriber chargers are way below the average monthly fees in the Japanese industry. And that is a model that Verizon should consider.
So, one senses that Verizon uses its infrastructure to control the networks, delivery of the content, and sharing revenues of the content – they key elements of what Yahoo should be able to deliver. Yahoo, on the other hand, must decide what is more profitable — to be a search engine, where the best value can be achieved or originate content, in effect to be a multimedia network such as Netflix or a CNN.