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Yahoo Shares Fall On Reports AT&T May Scale Back Partnership

Shares of Yahoo tumbled Friday amid reports that the Web portal's deal with AT&T to sell high-speed Internet access may be on shaky ground.

The companies reported to be negotiating potentially sweeping changes that could scale back their partnership, according to the Wall Street Journal.

The potential fraying of the alliance deals an unexpected new blow for Yahoo, which gets roughly $210 million to $290 million in subscription and advertising revenues annually from AT&T, according to Goldman Sachs analyst Anthony Noto.

AT&T spokesman Michael Coe declined to comment on the Journal report, which cited a person familiar with the matter, but said the two companies had an "open dialogue."

Yahoo officials were not immediately available to comment.

Yahoo shares fell $1.64 to $29.07 in early afternoon trade on Nasdaq. They had risen around 13% so far this year, prior to Friday's decline. AT&T shares firmed 11 cents, or 0.3%, to $36.62 on the New York Stock Exchange.

After a series of business missteps last year that sent its stock down 35%, investors had been betting Yahoo was poised for stronger growth this year and next thanks to a major upgrade of its advertising system last month.

Investors have not been reassured by data showing that Yahoo kept its top spot in February when it comes to U.S. Web traffic. According to data from comScore, Yahoo had 128.6 million unique visitors during the month, up 7% from 120 million in February 2006.

One reason is the growth of Google , which with the addition of YouTube to its holdings has nudged past Microsoft's sites into third place, according to ComScore data.

Some analysts were not surprised to see the alliance stumbling.

Deutsche Bank analyst Jeetil Patel said the model of paying Internet partners was outdated.

"With AT&T able to sell its products by itself, we question why it would want to continue paying $3 (per user) to Yahoo," he said.

AT&T, formerly known as SBC Communications, struck a broadband marketing partnership in 2001 in which SBC paid Yahoo a small cut for each high-speed Internet access customer. The deal covers AT&T customers in the 13 states where the top U.S. phone company operates.

The deal, which gave Yahoo a predictable revenue stream in addition to its mainstay advertising business, helped AT&T promote digital subscriber line, or DSL, as an alternative to cable broadband.

Since then, however, the widespread adoption of broadband has reduced the need for such promotional partnerships.

Furthermore, rivals like Google and Microsoft in the past year have struck a series of high-profile deals where they pay major computer and media companies for the privilege of marketing their services to their partners customers, reversing the trend of five years ago when AT&T and others agreed to pay Yahoo.

"Yahoo is likely in jeopardy of losing its AT&T deal, or at least a reworking of the deal that could materially scale back the relationship," analyst Scott Devitt of broker Stifel Nicolaus wrote in a research note to clients.

Yahoo has similar broadband deals with major phone companies Verizon Communications and BT Group and Canadian cable Rogers Communications.

A scaling back of the partnership would also show AT&T has become less reliant on Yahoo. AT&T closed its acquisition of BellSouth late last year, consolidating ownership in their joint mobile venture, Cingular, and bolstering its position as the biggest U.S. phone carrier.

While sales of traditional phone services have been declining, AT&T has been expanding on the back of growing subscriptions to Internet and wireless services.

AT&T has been developing its own Internet-based video service, U-Verse, to compete with cable companies. It also sells a package of satellite video, Internet and phone services, called Homezone, through a partnership with EchoStar Communications' DISH Network and Yahoo.

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