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Sometimes the scope of the strikeout matters.
When Verizon acquired Yahoo for $4.8 billion in 2016 after spending $4.4 billion for AOL a year earlier, investors and analysts were skeptical. It turns out they were right to be. Verizon announced Tuesday it was writing off $4.6 billion from those two deals, erasing nearly half of the companies' combined value.
At the time, Verizon weathered criticism about not only buying past-the-prime assets but also being too cautious with its acquisition strategy. Its primary competitor, AT&T, had just agreed to spend $133.5 billion ($175 billion with debt) on DirecTV and Time Warner, firmly planting its media flag. Yahoo and AOL seemed like a meek response.
In hindsight, Verizon's inaction may have been its best action.
Some felt it would be impossible for a combined AOL and Yahoo, which were renamed Oath, to have the scale to take on Google and Facebook in the digital ad market. That criticism has proven to be correct. Oath's U.S. digital advertising market share fell from 4.1 percent in 2017 to 3.3 percent in 2018 and is on pace to fall below 3 percent in 2019 and 2020, according to research firm eMarketer.
"Verizon's Media business, branded Oath, has experienced increased competitive and market pressures throughout 2018 that have resulted in lower than expected revenues and earnings," Verizon said in a filing Tuesday. "These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business."
But Verizon has won points from investors for failing small instead of failing big.
AT&T has likely destroyed about half the value from its $49 billion DirecTV deal, according to Craig Moffett, an analyst at MoffettNathanson, who has covered the telecom industry for more than two decades.
And now AT&T must prove it didn't make another mistake buying Time Warner "at the top of the market," Moffett said. AT&T paid $107.50 per share for Time Warner in Oct. 2016, about a 40 percent premium to where Time Warner traded before Bloomberg News broke the story that the companies were in talks.
So far, investors have applauded Verizon's renewed focus on expanding its 5G network rather than paying huge dollars to enter the pay-TV business. Verizon shares have gained more than 12 percent in the last 52 weeks. AT&T, on the other hand, is down 19 percent.
Even Tuesday, when Verizon announced its writedown, shares were up about 1 percent to about $59. Criticism about being too gun-shy to enter the media business has turned to praise for only dipping a toe in the water.
The big question for AT&T in the coming years is if it can generate a return on its Time Warner investment by capitalizing on mobile video. WarnerMedia, as Time Warner is now known within AT&T, will offer a three-tiered streaming product that will consist of movies, original shows and library content. HBO's over-the-top service HBO Now will also still exist as a standalone product.
These products can be bundled with AT&T wireless subscriptions to drive customer acquisition and retention. But as AT&T offers WarnerMedia content to customers outside of the traditional pay-TV bundle, it may be diminishing the value of that content within the bundle. That could drive pay-TV distributors, such as Comcast, Charter and Dish, to lower the affiliate fees it pays AT&T for that programming, which would no longer be exclusive to customers paying for the entire bundle.
AT&T probably can't count on digital advertising to make up the difference, as Oath illustrates. AT&T bought AppNexus earlier this year to marry its analytics with WarnerMedia and DirecTV. Still, the majority of revenue from HBO, CNN, TBS, TNT and other WarnerMedia properties comes from those subscription fees. And direct-to-consumer subscription services will cannibalize that business.
Preserving value from the traditional TV product while driving value from subscription services could determine the fates of AT&T investors and executives. Verizon doesn't have these concerns.
You can't win if you don't play. But you also can't lose.