Can Verizon Unlock Yahoo’s ‘Hidden Value’?

Yahoo, the online pioneer that defined how people searched the web, read digital content and sent email, is being sold to Verizon for $4.8 billion in cash, closing a chapter on one of Silicon Valley’s earliest innovators that failed to keep up with tech developments in the very internet it made reachable to millions of people.

The brainchild of two Stanford doctoral students, Yahoo’s two-decade run as an independent internet company reached a high in 2000, when its market value hit $125 billion during the dot-com boom. Yahoo even tried to buy Google in 2002, but was rebuffed. Years later, it would reject a buyout bid itself of $45 billion from Microsoft. Today, Yahoo is worth a much-diminished $36 billion. Compare that to Verizon’s market cap of $228 billion.

In a letter to employees, Yahoo CEO Marissa Mayer said the deal represents a “great outcome” for the company. Not only will it unlock shareholder value, but “it is also a great opportunity for Yahoo to build further distribution and accelerate our work in mobile, video, native advertising and social.” To grow, Yahoo hopes to leverage Verizon’s vast base of 100 million wireless users and industry-leading cellular, broadband and Internet TV networks.

Investors didn’t buy it, however, selling off Yahoo shares on the day the deal was announced. Verizon shares were slightly lower.

“Yahoo’s early story mirrored the story of the early internet. Yahoo got started in 1994 and quickly established itself as the go-to destination to find interesting content on the web. It had a phenomenal IPO and was valued at over $100 billion at its peak,” says Kartik Hosanagar, professor of operations, information and decisions at Wharton. “That valuation epitomized the belief that many shared about the internet’s long-term potential. Then the dot-com crash hit Yahoo like most other internet companies. Many companies went under, but Yahoo weathered that storm.”

He adds, “Unfortunately for Yahoo, it could not keep up with all the changes in digital media that happened post-2000, whether it was video (YouTube), social (Facebook) or mobile (WhatsApp, SnapChat).” According to Hosanagar, the issue was partly that Yahoo could never make up its mind on whether it was a technology company or a media company.
“While it claimed it was a media company and brought in several media executives, it was technology companies like YouTube and Facebook that were remaking digital media,” he notes.

“Yahoo’s early story mirrored the story of the early internet. Yahoo got started in 1994 and quickly established itself as the go-to destination to find interesting content on the web.”–Kartik Hosanagar

The ‘Peanut Butter’ Problem

Under Mayer, Yahoo significantly spiffed up its content offerings to attract eyeballs. It hired a cadre of prominent journalists, including former CBS News anchor Katie Couric and others from The New York Times, Time Inc., NBC News and Politico to report authoritatively on many topics. Yahoo also launched about a dozen digital magazines revolving around food, fashion, technology, politics, travel, movies, DIY projects and parenting.

Still, Yahoo did not change its content business model to fit shifting trends. “Business models separate winners and losers in today’s economic landscape,” says Barry Libert, senior fellow at Wharton’s SEI Center for Advanced Studies in Management and CEO of OpenMatters, which specializes in business model science. “Although Yahoo was among the early search firms, it never evolved its business model or board to keep track with either Facebook or Google. It remained tied to its roots and although it innovated its products and markets, it stuck to its knitting.”

Libert notes that in the classic business book, In Search of Excellence, the authors made a case for why sticking to the tried and true was critical to success. “But that thesis was [35] years ago. Today, sticking to your knitting and existing board and strategies has as much value as a cotton loom,” he adds. “The answer to Yahoo’s future laid in inverting its business and mental models. It didn’t and as a result, Yahoo will join the ranks of Encyclopedia Britannica, Kodak and Blockbuster.”

Yahoo collapsed under its own weight. According to The Wall Street Journal, an internal Yahoo memo penned by an executive in 2006 called the “Peanut Butter Manifesto” pointed to the company’s lack of a “focused, cohesive vision.” He said Yahoo’s problem was that “we want to do everything and be everything — to everyone. We’ve known this for years, talk about it incessantly, but do nothing to fundamentally address it.” He called Yahoo’s strategy similar to spreading peanut butter — a thin layer of investment across everything it does and “focus on nothing in particular.”

Meanwhile, pressure from activist investors added to its troubles. “Yahoo’s recent woes are as much a story about activist investors as it is about missing the next big thing,” Hosanagar says. “Activist investors like Starboard interfered with management and made decisions focused on short-term shareholder gains rather than long-term viability of the business. When investors observed that Yahoo’s market cap was lower than the value of its Alibaba holdings, many swooped in hoping to break up the parts and extract value. This is what ultimately resulted in the sale of Yahoo’s core business to Verizon.”

Yahoo’s Next Chapter

Verizon is planning to combine Yahoo with AOL, which it purchased in 2015 for $4.4 billion, to build a digital content and advertising juggernaut and compete with the likes of Google and Facebook. AOL and Yahoo together boast more than 25 brands including Yahoo Sports, News, Finance and mail as well as AOL’s Huffington Post, TechCrunch, Engadget and AOL.com. Combined, they count more than one billion monthly active users, including 600 million monthly active mobile users. Verizon also plans to use its programming relationships with the NFL, NBA and others to boost its combined content offerings even more. On programmatic ad platforms, Yahoo’s BrightRoll will complement ONE by AOL.

“The answer to Yahoo’s future laid in inverting its business and mental models. It didn’t and as a result, Yahoo will join the ranks of Encyclopedia Britannica, Kodak and Blockbuster.”–Barry Libert

Yahoo will retain its stakes in Alibaba and Yahoo Japan and the cash on hand. The company is changing its name once the deal closes in early 2017. Mayer plans to stay with the company at least through this next chapter of its life. The combined AOL and Yahoo will be headed by Marni Walden, president of Verizon’s product innovation and new businesses.

In a conference call with analysts this week, Verizon CEO Lowell McAdam said the Yahoo acquisition “will make us an even stronger competitor in digital media.” The telecom company’s goal is to be a “significant” player in the digital video marketplace, which is currently dominated by Google and Facebook. “By acquiring Yahoo’s operating businesses, we are scaling up to be a major competitor in mobile media.” Verizon’s goal is to grow the global audience of its mobile media business to two billion users and book $20 billion in revenue by 2020.

To that end, McAdam said Verizon has been building its video assets so it can deliver content anywhere and on various platforms. These include offering large and small bundles of linear content through FiOS TV, improved customer experience using IP-based technology, over-the-top delivery of content, the

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