Verizon's Risky Move Into Content May Prove Costly For Shareholders

  • Verizon bought AOL last year for $4.4 billion.
  • Verizon may bid as much as $10 billion for Yahoo.
  • Verizon has no clue how to run Internet businesses. Buy another carrier.

Verizon (NYSE:VZ) has a new strategy to capitalize on its mobile phone duopoly in the U.S. It's going to buy the content those mobile phones use, push users toward it, and profit from vertical integration.

The first step was buying AOL last year. The former America Online had content assets like the Huffington Post and TechCrunch, as well as a video ad network. The second step will be to buy Yahoo (NASDAQ:YHOO) in the present auction. It is hinting it could pay as much as $10 billion, which would easily beat other bidders.

There are, reportedly, several other bidders. Time Inc (NYSE:TIME), the magazine company split off from the movie studio, may make a bid. There are reports of interest from Alphabet Inc-A (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT). The Daily Mail, a British newspaper, was reportedly interested, in partnership with private equity.

Most, however, think that a Verizon bid of anywhere near $10 billion would blow everyone else out of the water. It is a virtual first option.

Any bid will be directed by AOL head Tim Armstrong, now a Verizon employee. The idea would be to combine Yahoo’s advertising engine with AOL’s, and funnel people to Yahoo video content through Verizon Wireless.

Other carriers are also moving more into content. AT&T (NYSE:T) owns DirecTv, the satellite video service. Comcast -A (NASDAQ:CMCSA) owns NBC Universal and has a big stake in many new Internet properties, like Vox and Buzzfeed.

The problem is that Yahoo remains a troubled brand. It’s a distressed asset, and CEO Marissa Mayer has had her reputation ruined running it. While the company has been delivering $5 billion/year in top line, it is only marginally profitable and has only maintained its top-line position through constant investment in new companies, investment, that has now stopped. Yahoo is also losing top managers.

Verizon has no history solving these kinds of problems. It has no history dealing with “talent,” management or otherwise. Tim Armstrong may have convinced Verizon he has that ability, but he has not convinced the market. Before Verizon bought AOL it was thought to be as troubled as Yahoo is.

Verizon’s plan also depends, in part, on ignoring network neutrality rules that have come into force on wired infrastructure under the current FCC, but rules that don’t exist on wireless. If Republicans win the White House in the fall, Verizon will benefit. If Democrats win, the rules could be extended to wireless and the rationale for the purchase looks even weaker.

None of this is yet a serious threat to Verizon’s dividend. Verizon brings in $34 billion/quarter, mostly from its Verizon Wireless unit, against about $1 billion for Yahoo, and it earns twice its 56 cent/share dividend each quarter. But if management gets distracted trying to build consumer content into what has been a business carrier it could spell trouble down the road.

You can do better. AT&T stock currently yields nearly 5% in dividends, against 4.3% for Verizon. It is a much better choice.

Dana Blankenhorn Dana Blankenhorn   on Amigobulls :
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