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Why Verizon wants to buy an ailing Yahoo in $4.8B deal

After months of negotiating, Verizon reportedly plans to purchase Yahoo! The purchase would bring an uncertain future for the internet company. . (Video: Reuters)

Two years ago — an epoch in Silicon Valley time — AOL chief executive Tim Armstrong proposed a merger to Yahoo chief executive Marissa Mayer.

Armstrong and Mayer are former Googlers hired to run and rescue these former marquee Internet destinations. But AOL and Yahoo were struggling in an increasingly mobile online world dominated by Google and Facebook.

Mayer rejected Armstrong's offer.

But now that AOL-Yahoo merger is set to take place in a wholly unexpected manner — thanks to Verizon, the largest U.S. phone carrier. On Monday, Verizon and Yahoo announced that the telecom giant agreed to buy the ailing Internet company in a $4.8 billion deal. Last year, Verizon bought AOL for $4.4 billion.

“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company,” said Verizon chief executive Lowell McAdam in a statement.

Verizon has always been considered to be one of the most likely suitors for Yahoo, which has been officially for sale since April, after several years of failed turnaround plans executed under Mayer.

With the deal, Tim Armstrong would in many ways be getting the merger he once wanted.

"Combining Verizon, AOL and Yahoo will create a new powerful competitive rival in mobile media, and an open, scaled alternative offering for advertisers and publishers," Armstrong said in a statement.

Armstrong, who heads Verizon's AOL unit, is expected to be a key player. A reading of his tenure at AOL offers some insight into what the future may mean for Yahoo, which would probably turn into a more focused advertising company.

AOL is still heavily involved in media content, thanks to its ownership of the Huffington Post, but even with those businesses, it has kept a strong advertising focus.

Many admire Armstrong for sticking with AOL, said Eric Jackson of SpringOwl — a firm invested in Yahoo that has been very critical of Mayer’s tenure at Yahoo.

“​He could have quit a couple of years into it,” Jackson said. “Many people say to me they wouldn’t do business with AOL if it was anyone but Tim Armstrong.”

Landing Yahoo would also provide Verizon with a sizable cut of the U.S. online market. Yahoo and AOL might not be trendy names, but they ranked No. 3 and No. 6 respectively in ComScore’s list of the top digital media properties in the United States in February.

Add AOL and Yahoo together, and their unique visitors were 50 percent greater than No. 1 Google.

[What you need to know about Marissa Mayer's future]

Verizon’s desire for Yahoo spotlights the grand scale of its ambitions: Not happy with just providing access to content, it wants to own a fat chunk of the online-content industry.

Consumers are migrating from simple email and Web browsing on their smartphones to rich mobile video and online games. And these data-hog services represent a lucrative opportunity to sell ads and, in some cases, could be a source of subscription revenue.

Analysts say the sprawling nature of Yahoo's properties led its leadership astray.

"Yahoo has failed for the last 13 years to exploit as a unified whole what is actually an excellent set of parts," said Shar VanBoskirk, an analyst at Forrester Research. "Yahoo hasn't been able to clearly define what it is and what value it provides."

Yahoo was a platform for content, and a failing one.

But Verizon apparently thinks that grabbing Yahoo’s content, combined with its strength in distribution, will allow Verizon to create better, more valuable ads, VanBoskirk said.

Verizon’s move first for AOL, and now Yahoo, signals how traditional telephone and Internet companies are worried that their businesses are being commodified. Cutthroat competition in recent years has prompted price wars. This pressure is what helped drive Comcast to snatch up NBCUniversal in 2011 and AT&T’s purchase of DirecTV in 2015.

Meanwhile, Internet providers such as Verizon face other pressures.

Federal data show that Americans are increasingly abandoning their home broadband connections in favor of mobile data connections. Analysts say the shift toward mobile partly explains why Verizon has been shedding some of its traditional wired operations in recent years. And it also provides insight into Verizon's pursuit of a proprietary mobile video platform Go90.

The nearly $5 billion bid for Yahoo highlights just how mightily the Internet company has struggled. After all, Yahoo's stock market valuation alone is $38 billion. But many investors think almost all of Yahoo’s value is tied up in shares it owns in the Chinese commerce site Alibaba and Yahoo Japan. Those shares are not part of Verizon's deal.

The sale of Yahoo comes with access to Yahoo's news operation and Yahoo Finance, a website for investors keeping tabs on Wall Street. It includes Yahoo's popular destination for fantasy sports, and its question-and-answer platform, Yahoo Answers. Plus, Yahoo owns the microblogging site Tumblr and the photo-hosting site Flickr.

The deal may also face some potential land mines.

Activists and regulators in Washington are increasingly examining strict new privacy rules on Internet providers, according to Craig Moffett, an industry analyst at MoffettNathanson.

To turn content views into advertising dollars, Verizon wants to use and share the behavioral data it collects on its Internet subscribers — including records such as its customers' Web browsing and location history.

But under the plan being weighed by federal regulators, Internet providers would be required to get their customers' explicit permission before using that data for third-party advertising.

In other words, customers would need to opt in, explicitly agreeing that their data be used.

The industry has fought the proposed requirement from the Federal Communications Commission, saying it would make it harder to adapt to the future.

The rules would do more than that, Moffett said: It would also make it harder for Verizon to justify spending billions on a Web property it cannot efficiently monetize.

"Buying Yahoo would be very much going in the direction of buying a significant amount of ad inventory," Moffett said. "And while it's likely the case that a mobile operator could increase the value of that ad inventory by overlaying better user targeting based on wireless location data, the FCC privacy regime may blow up that strategy."

Verizon's swallowing up Yahoo, after already buying AOL, transforms the telecom “into a big data super-giant,” cautioned Jeff Chester, executive director of the nonprofit Center for Digital Democracy.

“Yahoo is not a primary threat,” Chester said. “But when you merge Yahoo with the ability of an ISP [Internet-service provider] to monitor everything someone does, that’s a threat.”

The deal is expected to close early next year.