Just a little short of a decade ago I opened a connection with Yahoo at the request of a group of big Tier Ones. They wanted to create a cooperation between Yahoo and operators to fend off the issues of OTT competition by essentially joining the enemy camp. Jerry Yang was running Yahoo at the time, and my contact told me that he saw the telcos as enemies and my initiative was dead on arrival. Now a telco is buying Yahoo, and you really have to go back to that early interest in partnership to understand why, and what could go wrong.
The Internet has revolutionized our lives, and it also revolutionized the business of networking. Up to the time of the Internet, telecommunications services were paid for based on a combination of the bandwidth of the connection (implicit or explicit) and the duration of service. The Internet ushered in bill-and-keep and usage-insensitive pricing, and from the point where consumer broadband became popular, operators’ revenue-per-bit began to fall faster than cost improvements could match.
The reason for this was that for over-the-top players and applications, the Internet was a kind of free delivery. You paid to attach to an ISP and you bought access to every consumer on the planet. The applications that made the Internet a personal revolution made Internet traffic a losing game for those who carried it. What operators hoped for a decade ago was a way of partnering with the OTTs to share revenue, share cost of transport, or both. Given that the status quo was highly favorable to OTTs, it’s no surprise that Yahoo wasn’t interested, nor were other OTT giants.
Underneath the whole bits-and-settlement thing, though, there was another economic truth. Ads were what sponsored OTTs, and ad budgets have actually fallen from their global high. At best, it’s a zero-sum game. On the other hand, the telco market is for paid services and the global revenues of all telcos is at least an order of magnitude greater than total online ad spending. Limited total market, increasing startup competition—somebody had to lose and Yahoo was one (AOL was another, and Verizon bought them last year).
At a high level, this points out the negative side of Verizon’s decision. Why buy into a market that’s capped at a fraction of the market you’re in, where competition has already undermined the player you’re buying? The argument is that Yahoo is cheap for the potential it offers Verizon, but what potential exactly is that, and what does “cheap” mean? The financial analyst consensus is that Yahoo would be experiencing almost 7% negative growth in the next five years, and both Yahoo’s and Verizon’s stocks were off the morning after the deal was announced.
Then there’s another more “underlying” truth, literally, to the deal. No network operator can enter the OTT space with the thought that the move will overcome their declining profit-per-bit. If you and your competitor both depend on network transport to reach eyeballs for ads, and if you have to subsidize a loss on that transport while your competitor does not, you’re in trouble.
What’s in this for Verizon, then? The probable answer is the same as it was with the AOL deal, which is two things—platform and brand.
Verizon is like a lot of telcos in that it has a specific footprint. Yes, its mobile operations can span the globe with roaming, but it has a TV presence where it has FiOS, which is its old territory in the northeast. Wireline infrastructure is local; advertising is a mass market, and that’s particularly true when delivered via web applications/pages. Verizon probably reasons that having ad capability in general, at the web level and across screens, will help it sell advertising and monetize some of the traffic they’re losing money on carrying. AOL and Yahoo also give Verizon a national video and ad delivery capability, and a baseline set of customers and services.
The platforms Verizon has acquired could also be very useful—obviously for the services they already support but also for related services. They could be leveraged in Verizon’s mobile base and also perhaps in their FiOS broadband and TV properties. They could also, in theory, form the basis for self-care offerings for consumers and even be adapted to delivering business services.
The challenge, obviously, is whether all this potential can/will be realized and whether the two properties are worth a combined ten billion. That’s harder to say, but it is possible to see how Verizon might be able to maximize their opportunity.
First, OTT assets are uniquely software-based because they are “over the top” of the network. The influx of software assets and expertise could be of great value to a network operator at a time when it’s clear that service value and operations efficiency will in the future depend on software.
The question is whether Verizon will keep their AOL and Yahoo assets so compartmentalized that they won’t have a chance to do anything they’re not already doing. Given that what they were already doing wasn’t enough to prevent both companies from losing market share rapidly, that’s not a good outcome. What Verizon has to do now is work to define a unified service platform architecture that can host all this agile OTT asset stuff, and that provides a means of selectively linking it with cloud features, SDN connectivity, NFV functions, and so forth.
Such a platform would also promote the second pathway to optimizing opportunity, which is to leverage the OTT stuff to jumpstart carrier cloud. What all telcos need, including Verizon, is a credible and quick way of generating ROI from a widespread, edge-focused, cloud deployment. If you could get AOL and Yahoo stuff to lead the charge they could in theory build enough mass to create credible economies of scale, and thus lead to other exploitations of those edge data centers. That would be a huge step toward both NFV deployment and cloud computing success for the telcos.
Yahoo could help Verizon exploit an unheralded asset—real estate. There are about ten thousand central office locations in the US, for example, and they’re all natural places to house small cloud data centers. They’re at the end of the broadband wireline connection and they also often provide trunking for mobile services. They’re close to the subscriber, and that’s a potentially enormous benefit, not for video (you can cache to overcome transit delay as long as you don’t have a lot of jitter) but for transactional activities including IoT. And, of course, including ad service. How many times have you experienced page-loading issues that arise from ad network delay?
This isn’t going to be easy for Verizon. Buying AOL and then Yahoo doubles down on a strategy that depends for success on reversing a negative trend in the market share of its acquired properties, in an industry where Verizon has no experience. Most of all, it depends on creating symbiosis. I hope Verizon can demonstrate how that can happen, but it’s too early to tell.