Verizon bought AOL last year, and is now seriously evaluating a move for Yahoo (NASDAQ:YHOO). It is trying to buy its way into the digital media realm, and now has titles like The Huffington Post and TechCrunch under its wing. If it buys Yahoo, it will not only acquire a search engine and more digital advertising power, but also things like the Yahoo Sports radio network and Yahoo Finance.
It's a huge, sprawling empire, and 20 years ago, it would have made enormous sense to many analysts. But we have learned something about media since then. It doesn't scale well. Anything that requires people to create, and reporters are still people, has difficulty scaling.
It's a problem the journalism industry has been facing, unsuccessfully, ever since the Web was spun. In the 1990s, reporters bemoaned the fact that most markets had just one printed newspaper. Now some markets don't even have that. Giant news organizations like The New York Times (NYSE:NYT) have been brought to their knees, turning themselves into digital newsletters with paywalls in an attempt to stay relevant. Others, like the Washington Post, Chicago Tribune, and Las Vegas Review-Journal have been bought as billionaire playthings because they can no longer survive in the marketplace.
There are digital news groups that are hanging in. Companies like BuzzFeed and Vox and Gawker are able to use "clickbait" techniques borrowed from advertising to generate huge amounts of traffic. The Huffington Post, now part of Verizon, pioneered this technique. But while this is profitable, it's not enormously so - the sites have to continually ramp-up traffic just to stand still, as online ad rates keep falling because inventory is nearly unlimited.
But let's talk about AT&T. It may be on an even more quixotic quest in the cloud. While Verizon has announced a surrender in this area, shutting down its public cloud and essentially becoming a re-seller, AT&T plows gamely on, like Jeb Bush, announcing new features, adopting open source, and turning its old central offices into cloud data centers.
Both Verizon and AT&T have the capital structures needed to make a major play wherever they choose to make it. But both also require enormous profits to maintain high yields - 4.5% for Verizon and 5.25% for AT&T. They can't forego profits. Right now, both can handle the load given their duopoly status as mobile phone carriers. But, even there, the competition is getting tighter, the capital needs greater.
Investors will have to decide which of these quests hold the most promise, assuming either does, and stop treating Verizon and AT&T as two sides of the same coin.
Personally, I prefer the AT&T strategy, which is going to be more expensive but at least is similar to the business the company is now in. I've been a journalist for nearly 40 years and know better than most how that is no way to make money.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.