A Blog by Jonathan Low


Dec 13, 2018

Verizon Takes $4.5 Billion Charge For AOL, Yahoo, Other Digital Content Purchases

Combining two weak companies does not make a strong one.

Verizon thought its power as a deep-pocketed mobile giant, with the addition of some legacy tech gloss would allow it to compete with Google and Facebook.

And to no one's surprise, it turns out to be more complicated than that. As a final irony given its own role in eliminating net neutrality, Verizon will now join the growing chorus of those calling for regulation of Google and Facebook. JL

Sarah Krouse and Micah Maidenberg report in the Wall Street Journal:

Verizon spent $9 billion acquiring AOL and Yahoo, hoping the combination would make it a more powerful force in digital advertising, but its share of that market has shrunk. The marriage of AOL and Yahoo didn’t go as planned because integrating their advertising platforms has taken longer than expected. In addition, Verizon executives were unwilling to share data on wireless subscribers that would have created more sophisticated ad targeting. The moves are part of a retrenchment in digital media as legacy companies and upstarts fail to loosen the grip of Facebook and Google.
Verizon Communications Inc. is booking a $4.5 billion accounting charge related to its Oath media business, conceding that the company’s bet on high-profile internet properties hasn’t worked out as planned.
The wireless giant spent more than $9 billion to create the Oath business by acquiring AOL in 2015 and then Yahoo in 2017, two web pioneers that were struggling to grow. Verizon hoped the combination would make it a more powerful force in digital advertising, but its share of that market has shrunk instead.
Unable to turn the tide, Verizon recently scaled back its internet ambitions. Executives are exploring ways to supplement weaker-than-expected advertising revenue and potentially wind down some AOL or Yahoo brands.
The moves are part of a broader retrenchment in the digital media marketplace as legacy companies and once-hot upstarts alike fail to loosen the grip of Facebook Inc. and Alphabet Inc.’s Google on both users and marketers.
Several new-media companies, including Vox Media, BuzzFeed and Vice Media, have run into challenges meeting ambitious revenue-growth targets, due in large part to the punishing digital advertising market, The Wall Street Journal has reported.
Vice is cutting 15% of its workforce through attrition, while Vox Media and BuzzFeed have focused on diversifying to generate more revenue from areas such as video licensing and e-commerce. Smaller online publisher Mic recently sold itself for about $5 million, a fraction of its $100 million valuation in 2017.
U.S. digital ad spending is on track to rise 26% this year to about $111 billion, but Google is capturing 37% of those dollars while Facebook accounts for another 20%, according to estimates by eMarketer. Oath’s share is expected to fall to 3.3% from 4.1% last year.
“These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business,” Verizon said in a securities filing Tuesday.
Meanwhile, Amazon.com Inc. has emerged as a new competitor for digital ad dollars. It is now the No. 3 U.S. player and is on track to double its online ad business this year, according to eMarketer. The online retailer gets most of its ad revenue from its website where companies pay to be listed as a “sponsored product” in search results.
Verizon said the roughly $4.5 billion after-tax noncash charge will cancel out the majority of the current goodwill balance for Oath. Goodwill measures the difference between how much a company paid to buy another business and the value of the acquired hard assets.
The company said Tuesday that Oath “has achieved lower than expected benefits from the integration of the Yahoo Inc. and AOL Inc. businesses.”
The Wall Street Journal reported earlier this month that Verizon was preparing to write down the value of Oath assets.
In the first nine months of this year, revenue from Oath totaled $5.6 billion, a sliver of Verizon’s total $96.6 billion in revenue during that period. Verizon in October said the unit’s revenue was likely to be flat in the near term and that it didn’t expect to meet its goal of generating $10 billion in annual revenue from Oath by 2020.
Oath houses media and technology brands, including HuffPost, Tumblr and Yahoo Finance. In September, the company said Oath leader and former AOL chief Tim Armstrong would be stepping down. His decision came after Verizon opted not to spin off Oath and instead fold some of the operations into the rest of the company.
The marriage of AOL and Yahoo didn’t go as planned in part because integrating their advertising technology platforms has taken longer than expected and still isn’t complete, people familiar with the matter have said. In addition, Verizon executives were unwilling to share with Oath some data on its wireless subscribers that would have helped create more sophisticated ad targeting, these people said.
Verizon executives are now trying to bolster revenue at Oath by creating premium content and exploring e-commerce. While the unit will still sell digital ads, it is trying to keep visitors on its sites longer and make it easier for them to make purchases through its web properties.
Oath leaders are in the throes of an effort called “Project Purple” that aims to identify the strongest brands the unit houses. That effort could result in some brands being closed or merged, the Journal has reported.
The unit is now headed by K. Guru Gowrappan, a 38-year-old former Yahoo and Alibaba Group executive. At a November event, Mr. Gowrappan told employees that Oath is home to brands that “laid the foundation for the internet,” adding that some were “extraordinary and some forgettable.”
Executives are also trying to pipe more of the unit’s content into Verizon devices and services. For example, Oath plans to put its Yahoo Finance video-streaming application, which includes markets and personal-finance coverage, on Apple TV this month, according to people familiar with the matter.
Hans Vestberg, Verizon’s new chief executive, recently restructured the wireless carrier, creating a new Verizon Media Group that houses Oath. The former Ericsson AB executive took over on Aug. 1 and has led a companywide push to cut costs and has made building a faster 5G network the center of the company’s strategy.
Mr. Vestberg has charged Oath executives with identifying how news, sports and augmented and virtual reality content would benefit from the 5G wireless network the company is starting to build.
Verizon also disclosed Tuesday it would book an after-tax charge of as much as $1.6 billion in the fourth quarter for a voluntary retirement package for more than 10,000 of its workers.
The company has charted a different course from other telecom or cable providers, who have made outsize content acquisitions. Verizon has put building out a faster 5G network at the center of its strategy.
Verizon shares have outperformed its rival AT&T Inc., which acquired Time Warner during the year after winning an antitrust case. The deal gave AT&T control of HBO, Warner Bros. studio and cable networks like CNN and TBS.
Shares of Verizon, which rose 1% on Tuesday, are up 11% so far this year. AT&T has fallen about 20%. Verizon is now the more valuable company, with a market capitalization of $243 billion, compared with AT&T’s $216 billion.


Post a Comment