Yahoo, born in 1994, was likely the only successful example of the Internet's earliest business model: invest in "eyeballs," then magically monetize page views to generate profits. Much to the chagrin of a generation of early Internet investors, there was no magic—there was only the old newspaper model of basing ad prices on circulation numbers. Though Google and Facebook are now the dominant examples of ad-driven eyeball monetization—accounting for roughly half of all Internet advertising revenues—Yahoo! was its first true beneficiary.
Yahoo's downfall came for precisely the same reason that so many once-successful ad-driven publications have faded: it failed to keep up with the times. Technology, media, and advertising are all fast-moving industries. No one much cares about past performance.
Even technology giants who entered the Internet era with impressive assets—like Microsoft—never made that leap. Google and Facebook flew past Yahoo for the simple reason that they were better at delivering what people wanted. They have offered more attractive combinations of technology, interface, and content for long enough to rule the roost. Yahoo's own ad-driven revenues have fallen below 5 percent of the total; hardly a pittance, but not enough to compete.
All of which leads into two key questions for the future: What next for Verizon? And what next for Yahoo?
Verizon has successfully navigated several generations of technology, growing from a local telephone utility to a major provider of landlines, mobile communications, television, and Internet services. It possesses one of the best—if not the best—portfolio of communication infrastructure properties in the world.
As an infrastructure-based company, however, Verizon has long been content agnostic. Companies who own physical networks and deliver content don't much care what their customers want delivered; their primary focus is on the customer's choice of delivery services. Over the past decade or so, however, the distinction between content and conduit has been blurring. Though hardly the first to attempt it, Apple proved the value of that blurring spectacularly with its integration of iTunes and its iPods—simultaneously revolutionizing music distribution and the hardware on which we listen. Sony and Microsoft have exploited that blurring in the world of gaming; Netflix grew from a movie distributor to a production company.
Verizon—able to read the writing on the wall—understands that it must marry its impressive infrastructure and delivery to world-class content. In recent years, it has acquired AOL and its various content sites including Huffington Post. Yahoo's portfolio will expand their offerings, particularly in areas like news, sports, and finance. While Verizon will still have quite a way to go before catching Google or Facebook, it could conceivably turn itself into the third biggest recipient of Internet advertising revenues in the not-too-distant future.
From a Verizon investor perspective, the short-term effect is likely to be negligible. With a market cap of $230 billion, the Yahoo properties will represent about 2 percent of their new parent's value. Even if they prove to be worthless, the $4.8 billion price tag comes down to a bit more than $1 a share—basically noise within the fluctuations of even a stable value stock like Verizon.
The real question involves the long term. Verizon seems serious about turning itself into a competitive content provider. Will it use Yahoo as the cornerstone of a new division into which it sinks significant further investment? Will it leverage Yahoo's key personnel—beginning with CEO Marissa Mayer—to roll out such a division? If so, investors will face the same upsides and downsides inherent in any corporate move into an adjacent market. Though the bet seems reasonable, success is hardly guaranteed—and stable value investments like Verizon are rarely known for their bold risk-taking. Thus, even if the acquisition has little effect on Verizon's profitability, it could well attract a different class of investor.
Furthermore, though this particular acquisition is unlikely to raise complicated merger challenges from the antitrust authorities, the intertwining of content and conduit inherent in a Verizon media division is likely to generate interest at the FCC. The controversies over "net neutrality" are entirely about the incentives for a service provider—which Verizon has always been—to favor content from selected sources. The continued integration of content properties into leading providers guarantees that the controversies will not fade soon.
As to Yahoo, shorn of its operating assets it becomes a holding company—a sizable investor in the Chinese e-commerce company Alibaba, and possessor of a solid patent portfolio. This model is similarly a sign of the times. Though patent exploitation firms have had a rough two years, various combinations of patent licensing and litigation have created and lifted some sizable success stories. There is certainly room for the rump holding company to generate profits and benefit shareholders. The key challenge remains pricing it correctly—an assessment that requires a diligent review of its investments and patents. Given that these skills, and the profile of the company they define, differ greatly from those required to assess an Internet operating company, Yahoo's new complexion is likely to change the profile of investors who find it attractive.