Yahoo Should Capitalize Expansion Opportunities

| About: Yahoo! Inc. (YHOO)

Summary

It is rumored that Yahoo Inc. is attempting to acquire NDN in order to expand its video streaming business after failing to acquire Dailymotion and Hulu last year.

The company is aiming to get in competition with YouTube and approach its dissatisfied stars to join Yahoo’s cause.

The market outlook is positive: Cisco’s VNI initiative projected the global consumer internet video traffic to grow from 57% of total consumer Internet traffic in 2012 to 69% in 2017.

If the rumors are true and the deal is finalized then the company will be able to boost its financial performance and market position.

Yahoo Inc.'s (NASDAQ:YHOO) CEO Marissa Mayer has been putting diligent efforts into turning the company around since she took control two years ago. Mayer's interest in Yahoo's expansion in the video business is evident in Yahoo's attempt to buy a majority stake in French video-sharing site Dailymotion, a video streaming website often called "the YouTube of France." This attempt was made last year with an offer of $300 million but was unsuccessful and declined by the French Government. Furthermore, Yahoo also endeavored to scoop up Hulu, an online TV show and movie streaming website for $800 million during the previous fiscal year but this deal was incomplete as the owners backed out.

But as stated in the opening sentence of this article, the company's CEO Mayer has not yet given up. Now the company is rumored to be making another try by acquiring a player in the video streaming market to enhance its video platform. Therefore, in this article I will discuss the current activities of the company in this regard along with the company's prospects in the video streaming business if these rumors turn reality.

Yahoo Inc. is a global technology company dealing in search, content, and communication services on mobile devices and desktops.

Let us begin by discussing the company's recent activities in this regard that are generating these rumors and who the company is seeking to target.

Activities Creating Rumors

Although the company did not make any comments on this, Re/code's, a technology news site, recently reported that Yahoo is preparing itself to compete against YouTube by launching a superior next-generation video website in the coming months. Re/code also publicized that Yahoo is supposedly tempting popular YouTube stars by putting forward attractive financial offers and better brand exposure. Walter Mossberg's new indie tech news site, a CNBC partner, also reported that Yahoo is in contact with "some of the big networks now on the giant online video service."

The following heading will further discuss the activities of the company that are adding more fuel to speculations churning around Yahoo's attempts at a larger share in the ad-supported online video market.

Hiring Popular Experts

According to a recent report from Re/code referred earlier, Yahoo has begun approaching YouTube's big star talent and networks to join Yahoo to accomplish its objective. In order to attract and convince them to serve under Yahoo, the company is offering them better economies than YouTube. In other words, Yahoo is attempting to gain from the content providers' displeasure regarding the money (or lack thereof) they earn from YouTube.

Re/code disclosed that YouTube video makers have often grumbled about the low remuneration they receive from the company. On the other hand, Yahoo is proposing content producers either enhanced ad revenue or definite ad rates for their videos. Yahoo is also planning to offer wide-ranging promotion on its heavily visited homepage along with the prospect for video makers to sell their own advertisements.

Additionally, the company will discuss its upcoming Q1 FY 2014 financial results via live stream video that will be broadcasted from Yahoo's Sunnyvale studio. Through this, the company itself is promoting its video streaming services.

All of these initiatives and reports indicate the company's interest and commitment to establishing its position on the web video programming platform and improve its video advertising returns. Now let's discuss the player that Yahoo is targeting.

Who is the target this time?

According to the Wall Street Journal, Yahoo is in initial dialog to acquire Atlanta-based online video syndication company, News Distribution Network (NDN.TO), for around $300-400 million. This is the same amount that the company was willing to pay for Dailymotion, last year. This internet portal was looked on as a potential target by Marissa Mayer since she became the company's CEO in 2012. If successful, this acquisition will turn out to be Yahoo's second key purchase under Mayer's leadership, after Tumblr for which it paid $1.1 billion.

NDN was founded in 2007 with an aim to provide solutions to web publishers and content creators to operate productively in the web environment to boost profits. These solutions are provided free as the company does not produce its own video content but broadcasts a collection of about 100,000 videos on news, sports, politics and other topics to news websites such as The Los Angeles Times, New York Daily News, Bloomberg, and other online publishers.

According to comScore Inc. "SCOR", supplier of digital analytics solutions to enterprises, NDN is the No.4 online video website in the U.S. with more than 573 million video views per month and 51 million unique viewers.

Now before discussing the Yahoo's prospects through expansion in ad-supported online video services let us briefly discuss some facts about the market.

Ad-supported Online Video Market and Outlook

Google Inc.'s (GOOG, GOOGL) YouTube is the second most visited website on the internet, following Google, capturing more than 1 billion unique users every month. According to Sandvine's Internet traffic trends report, YouTube accounted for 18.6% of all North American Internet traffic in the second half of 2013 making it a frontrunner in both the video and music streaming segments with websites like Pandora Media Inc. (NYSE:P), Spotify and others trailing it.

Facebook (NASDAQ:FB) has managed to move up quickly, assisted by its 6-second Vine videos and auto-load videos, and follows YouTube in this regard. AOL Media Network, Yahoo sites, NDN sites and Amazon sites have placed themselves in the subsequent positions, while VEVO (in which Google's YouTube recently bought a stake) is at number seven. AOL lead the ranking as far as ads viewed were concerned assisted by its Adap.tv acquisition. Liverail and Google occupy the second and third positions in ranking for ads viewed according to comScore estimates in January 2014.

Overall, the Cisco VNI initiative has projected the global consumer internet video traffic to grow from 57% of total consumer Internet traffic in 2012 to 69% in 2017. Additionally, Internet TV streaming will increase by 5 times from 2012-2017. All of this represents a fabulous opportunity in terms of video content sales and ad revenues for the players that will serve this industry. Therefore the following paragraphs will discuss the prospects for Yahoo from its expansion in the video streaming industry if the NDN acquisition occurs.

Prospects for Yahoo from this Move and Concluding Remarks

Although the strategic move to acquire NDN is big and bold, it is not that risky for an internet company like Yahoo that has a heritage back to the early 90s. This is because Yahoo has built up a huge amount of consumer data and established infinite content relationships. The company has been working in the field for many years and taking benefit of these gathered assets using the most prevalent information mediums and video streaming is a natural advancement. This could be a great thing that the company could do to enhance its profit growth. The potential of profit from expansion into these services can be seen as the Swedish video game reviewer PewDiePie who is among the 20 highest-earning YouTube stars has been seen making around $8 million per year (after Google takes its 45% share).

Moreover, the company is not new to this field and has experience in running a video sharing site. However, it will be more beneficial for the company to cash in its synergies from the NDN acquisition. Hence this acquisition may inoculate the company's growth into a business that investors seem to have overlooked as they eyed more prospects from Ali Baba IPO.

The Alibaba equity stake has been the subject of Yahoo's investment thesis and analysis for numerous years. Yahoo has a 24% stake in Alibaba that is likely to go public at a valuation of $150 billion making Yahoo!'s stake worth $36 billion. This is a prodigious investment for a company that only raised $33.8 million at its own public offering but without an organic growth it could be hard for Yahoo to maintain its valuation. Therefore the company should go ahead to capitalize on expansion opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.