Verizon (NYSE: VZ) bagged its latest digital media trophy this week, agreeing to pay $4.83 billion to add Yahoo's core online business to its growing digital media empire. The biggest mobile operator in the U.S. will integrate Yahoo with the AOL business it acquired last year for $4.4 billion, and the unit will be led by Marni Walden, Verizon's EVP and president of the Product Innovation and New Businesses organization.
A good fit – on paper
As I've written previously, Yahoo's web assets appear to be a good fit for Verizon. The carrier's subscriber base provides a massive distribution channel that can be leveraged almost immediately, giving Verizon another way to monetize its customers. Yahoo claims roughly 600 million users access its mobile websites and apps every month, and its high-profile brand opens the door for Verizon to ramp up its OTT efforts and reach huge audiences outside its subscriber base.
Other pieces of the puzzle seem to fit together nicely as well. Yahoo owns Flurry, which had made strong gains in mobile analytics before it was acquired in 2014for $200 million. Verizon's properties through AOL include Engadget, The Huffington Post and TechCrunch, providing additional online inventory for advertisers. Go90, Verizon's OTT video offering targeting millennials, complements the more traditional websites.
Potentially tying it all together -- on the mobile end, at least -- is Millennial Media, which Verizon bought for $250 million last fall. Millennial -- which, interestingly, was co-founded by former Verizon executive Paul Palmieri -- could essentially serve as the mobile extension of AOL and Yahoo, providing a unique platform for phone and tablet advertising alongside the other digital platforms.
An empire of small players
But it's worth noting that while Verizon is the largest carrier in one of the world's biggest mobile markets, their advertising properties aren't major players. Yahoo will claim only 1.5 percent of worldwide digital ad revenues this year, according to eMarketer, as its presence in that segment continues to wane. AOL and Millennial Media will account for only .7 percent of that market this year, eMarketer estimates. Further, eMarketer last year predicted Millennial Media will claim a tiny .2 percent share of U.S. mobile ad revenues in 2016, down from .5 percent in 2014.
And like its competitors, Verizon's record of expanding beyond its core telecommunications business into media and content is spotty at best. Its experiment to deliver mobile video via Qualcomm's MediaFLO network was a disaster from the outset, and its attempt to monetize full-track downloadsthrough its cumbersome Vcast Music was an unmitigated flop.
More recently, the carrier has struggled to gain significant traction with Go90 in a mobile video market dominated by YouTube and Netflix. Go90 is gradually gaining traction but faces "an uphill battle" against other mobile video and social networking apps and services, UBS analysts said last month. Verizon has yet to prove it can provide apps and content users really want, and it faces huge challenges in building a media and advertising business out of multiple disparate parts.
Putting the pieces together
And even if Verizon can somehow effectively integrate all those pieces effectively, the resulting revenues aren't likely to boost the bottom line substantially, as MoffettNathanson noted earlier this week. "Even if every part of Yahoo's business doubles, it would still only add about a dollar to Verizon's warranted share price," MoffettNathanson wrote in a research note. "Don't get us wrong; we think the strategy has merit. But investors should be sober about how difficult it will be to execute… and how little impact it may have on the battleship that is Verizon even if it does."
Verizon is clearly -- and rightfully -- looking to expand to other markets and businesses as the U.S. smartphone market slows to a crawl. And the carrier is making some savvy moves to recruit talent with expertise in those other markets, as evidenced most recently when it named former YouTube executive Ivana Kirkbride chief content officer for Go90. But acquiring all these puzzle pieces is the easy part -- Verizon must now find ways to make them fit together in ways that appeal to consumers, advertisers and content providers. And there's precious little evidence that it can do so. -- Colin | @colin_gibbs