Verizon has admitted that its purchases of Yahoo and AOL have resulted in…nothing much. The company is taking a massive $4.6 billion write-down on its Oath media unit, the repository for its AOL and Yahoo units, admitting that the residual value is only $200 million. The decline is largely the drop in brand (in financial terms “good will”) value, no surprise since most of us never heard of Oath. I’d bet that the fact that the two deals failed to return value is no surprise to most, either. We still have to ask “Why?” because the failure could signal some real challenges for operators down the line.
Let’s look at the explanations that various pundits have given. Verizon says, essentially, that Oath experienced an unexpectedly competitive environment. According to the Financial Times, Verizon is “dialing back” its media aspirations to focus on core telecom. The Wrap says the whole idea was shaky from the start. Billboard says that the Verizon units lacked the scale of Google or Facebook. Wall Street thought the whole idea was stupid long ago, and as a result have rewarded Verizon with a bit of an uptick on their stock.
Obviously the commentary is a bit shallow. Did Verizon expect something other than competition when they bought into a space to compete there? Did they miss that the companies they bought were not only not incumbents, but had long passed their prime? Yes, the deal was shaky from the first and in fact got a bit shakier as discussions progressed. As far as the Street is concerned, “buy on the rumor sell on the news” (or vice versa) has been the adage all along; stocks tend to move based on advanced predictions not current steps. Let’s then try not to make shallow things even shallower; let’s learn some real lessons.
The first real lesson of this is that Verizon didn’t know anything whatsoever about the OTT space. They literally didn’t know a good deal when they saw it, or a bad one. I don’t think Verizon is unique in that failing; I don’t think any telecom out there understands OTT even though they’ve been moaning about disintermediation for decades. The lack of OTT knowledge led to a decision to buy some companies that needed major rehab just to stay alive, when Verizon apparently believed it was buying somebody who had a real future.
The second real lesson is that separating new businesses into separate subsidiaries doesn’t immunize them against telco-think. Since Verizon did its deals, we’ve seen revolutionary changes in the industry, including some economic/political situations that have put the very competitors that threatened Yahoo and AOL in jeopardy. A company with a lot of free cash flow (read, a telco) and an aggressive plan for ad-subsidized services, could have run rampant. That Yahoo and AOL did not run rampant but fell over means that the insidious pressure of telco-think permeates even subsidiaries, that only companies who’d surrendered to telco-think can be bought by a telco, or both. Whatever the reason is, anyone who hopes for telco revolution in the OTT market should forget the idea.
Lesson three is the one I think is the most important one. AOL and Yahoo, in the end, were about ad sponsorship. Today, we are looking at a transformation of the business model for operators toward streaming video, a transformation that will create a massive change in how in-video advertising is done. The operators themselves are the drivers of this, first with mobile broadband and now with 5G/FTTN residential video delivery. Operators, then, failed to think through the transformation they were driving. Why? Because they persist in bottom-up thinking. That, in fact, is what “telco-think” really is.
One problem with starting your planning at technology or execution and working up the stack to value and benefits is that you tend to get focused on the present. The future, particularly in something as dynamic as the OTT/media space, is a complex interplay of a bunch of very low-inertia forces. Technology, capital equipment, and real estate and spectrum investments are very high-inertia stuff. When you’ve thought for centuries about things that took forever to do and lived forever once you did them, it’s hard to adapt to a fad-driven world. Particularly if you start by figuring out how to sell ads and only then get around to why somebody would want to buy them.
The question for Verizon and other operators is whether they are prepared to deal with the media market they created, even now. Assets like Yahoo and AOL don’t really matter much in the space that’s evolving. Video ad customization is a fairly new thing, but it’s about to become a very large thing as streaming video takes over from linear. That’s the shift that top-down thinking could have given Verizon advanced notice of, but even without advance notice players like Verizon and the other telcos have a potentially significant advantage—they know how to cache, they own where the caches need to go, and they have the network resources and real estate to support a cache hierarchy to optimize delivery.
What they don’t have is the demographics data needed to self-target. Should they try to get that, which means competing with the Googles and Facebooks of the world, or should they simply provide a means of coding ads they cache so somebody else’s demographics can then select from the inventory? It seems to me that the latter is the easier way to go, and that would align the future of media services—for Verizon and other telcos—with the real direction of the market, a direction that their own initiatives have largely set. Streaming video monetization is a new game, a game they can still win.
The question, as always with the telcos in particular, is whether they understand that. The biggest single problem telcos face is the inertia of the CTO organization. This group, responsible for looking into the future, has been perhaps as much obsessed with the past as any group in the industry. I blogged recently about the TMF notion of combining CIO and CTO groups, and that might help break the current thinking/planning logjam, providing that the CIO organization served market needs better. We don’t know if they would; certainly the inertia of OSS/BSS suggests otherwise.
There are a lot of smart, future-thinking, people at every operator I’ve worked with or talked to. Most of them are just as frustrated as the market and media are (and that, in Verizon’s case, investors surely are) with the pace of progress in new services. It may be that investor, board of directors, or even corporate raider pressures are the only forces that can break telcos like Verizon out of their current thinking. Something needs to, because the tale of the tortoise and the hare is a fable. In today’s market in particular, speed wins.