Yahoo: Who's Ready To Take On A Legacy Digital-Native Media Turnaround?

| About: Yahoo! Inc. (YHOO)

Summary

As Yahoo prepares to open its bidding envelopes on Monday, a day before its first quarter earnings call, we can savor the possibilities.

At 21, Yahoo — or as we report it, the core Yahoo, devoid of those smart and lucky investments in Alibaba and Yahoo Japan — is up for sale.

I know it’s a pipedream, but wouldn’t be great for Verizon and Time Inc. to team up to buy Yahoo.

Which picture would you like to see on the wall of digital media history alongside that all-time classic, Time Warner’s (NYSE:TWX) Jerry Levin half-smile as he brought new partner, AOL chief Steve Case, into the fold as the companies completed their $160 billion merger in 2000?

As Yahoo (NASDAQ:YHOO) prepares to open its bidding envelopes on Monday, a day before its first quarter earnings call, we can savor the possibilities. Just as her $12.5-48 million parachute inflates (and other execs get newly positioned for payouts), Yahoo CEO Marissa Mayer could join up with Tim Armstrong at AOL. A Yahoo — AOL tie up has been seen as imminent since long before Mayer’s time, with last-minute twists undoing the match-up before it became reality. Or how about Yahoo and Time Inc. (NYSE:TIME) CEO Joe Ripp, smiling for the cameras. Perhaps, Mayer could soon be holding a press conference with one of the anonymous-to-the-public private equity CEOs, who may front the money to match up the 21-year-old Yahoo with an experienced, if insufficiently monied, partner.

At 21, Yahoo — or as we report it, the core Yahoo, devoid of those smart and lucky investments in Alibaba (NYSE:BABA) and Yahoo Japan (OTCPK:YAHOY) (OTCPK:YAHOF) — is up for sale. What you can buy: Yahoo News, Yahoo Finance, Yahoo Sports, Yahoo Mail and a diverse assortment of other media properties, though many have been axed (POLITICO: “The ax falls at Yahoo”) as the company prepared to go to market.

Legions of smart and talented people have spent long and short careers in Sunnyvale. Even as we assess its future, as it finally surrenders its independent status, its life cycle must be put in perspective.

Founded on Jan. 18, 1995, three years before Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and nine before Facebook (NASDAQ:FB), it’s been a wild ride of misguided management, astonishing misdirection and enough bad execution to consume a shelf full of HBRs. Long before search and then social changedeverything, Yahoo’s directory set a new standard. The wild World Wide Web had been tamed, organized as John Dewey might have done if he had been alive for the digital revolution.

It seemed super-cool, and led the way to our certain sense that Portals-Would-Eat-the-World. They munched mightily, and Yahoo’s competitors of the early days – Excite, Altavista, Infoseek, Lycos (nostalgia fans, check here; the list sends a shiver down my spine of deals negotiated) – all faded into history, most as parts of something else. I still recall the day that Lycos CEO Bob Davis explained the business-changing business model of his then-high flying portal. He drew a large rectangle on a large white board, and then put all his vertical (topical) products along the top. Down the side, all the “exclusive” ad placements in each of the verticals. Before me: Dozens of boxes, offering that exclusivity in each niche. He’d found a way to sell near-infinite multiple exclusivity, he said with a smile, and the future was his.

Yahoo employed similar tricks of the trade and lots more over the years. Our number one word associated with the company: eyeballs. For a long time, Yahoo amassed enough of them to merit the ! that founders David Filo and Jerry Yang had affixed as they trademarked their name, the plain “Yahoo” already TM’ed by companies hawking barbecue sauce, knives and “human-propelled watercraft.” The exclamation point survived the 2013 redesign, when Yahoo, as it approached the maturity of its 19thbirthday, decided it was time to grow up, and drop its funky logo. Its luck, though, hasn’t changed, and the exclamation point has just become self-satirical punctuation.

As Yahoo now approaches the deal of its lifetime, its string of failed deals surface, perhaps for the last time prominently. Through a succession of CEOs, its reverse Midas touch persisted, as it plunked billions and millions into dis-synergy: buying Broadcast.com ($5.7 billion), Geo Cities ($3.7 billion) and Tumblr ($1.1 billion), among many smaller sinkholes. There’s no shortage of web pieces detailing Yahoo’s serial blunders; my favorite are in listicle form, and, of course, Recode co-founder Kara Swisher has filled the equivalent of several tomes on the topic, in her own-the-beat reporting.

Now, as we approach the deal that apparently will end the independent Yahoo we’ve known, we must ask: What could possibly go wrong?

As the weekend, some 40 bidders prepare to spend long weekends finalizing bids for the Yahoo’s core assets. Next week, I’ll plumb some of the numbers that may drive the deal, but for now, let’s survey the deal playground on which the deal may get done.

Jurassic Park

Among the likeliest bidders for Yahoo’s core properties – those media, news and mail properties that form the portal — are these ancient-in-the-teeth behemoths. Conventional wisdom puts Verizon (founded as part of AT&T (NYSE:T) in 1875, and the reconfigured to Bell Atlantic in 1982) in the pole position. Then comes Daily Mail and General Trust (founded in 1922), Time Inc. (first birthed the same year as DMGT) and CBS (1927).

Not all legacy media companies look on Yahoo with so much affection. Both News Corp (NASDAQ:NWS) (NASDAQ:NWSA) and Axel Springer, both on the hunt for acquisition, have passed on this opportunity.

Why? Five words: Legacy digital-native media turnaround. That capsulizes the challenge here. Yahoo may have revved its restart engines innumerable times, but still needs that turnaround. Turnarounds are expensive – in money and time – and many companies with access to the cash required think they can spend their money better elsewhere.

For Verizon, a buy would be still one more step moving into farther away from being the pipes company of its birth and cash flow generation.

One irony these would-be legacy buyers must ponder before they name their number: the market economics of the digital news media is taking another turn south (“Newsonomics: With new roadblocks for digital news sites, what happens next?”) with both legacy content producers and even the biggest digital news start-ups challenged by intense ad revenue competition.

The Multiverse

Yahoo is big. Able to claim an audience of 204 million unique U.S. visitors in February, it ranks third behind digital darlings Google and Facebook. That’s the big lure here, for the three main would-be buyers.

But big is relative, and gets to the central value question in this transaction. Is big as valuable today as it was 10 years ago? In the old portal metaphor, each could serve as its own universe, slicing and dicing up space on the site, as Lycos’ Bob Davis had demonstrated back before the Millennium. Yahoo, though, had had mighty issues monetizing its vast audience – similar problems increasingly experienced by both Time Inc. and DMGT’s Mail Online. In these scenarios, either Time Inc. or Mail Online would merge with Yahoo’s properties to create Something Really Big, though still sub-scale compared to Facebook and Google.

The Multiverse theory is the emergent one. In that one, it’s all about matching up endlessly multiple aggregations of discrete audiences, wherever they are found, through programmatic tech. In that worldview, no one else can get big enough to compete head-on with Google or Facebook.

The Rube Goldberg Machine

Eyeballs go in. Money comes out. It’s the simplest damn thing.

And that idea is behind the Verizon (NYSE:VZ) buy of Yahoo. The theory: AOL CEO Tim Armstrong has built one of the better ad machines out there, and has apparently satisfied his new bosses at the phone company with last year’s $4.4 billion acquisition of the Yahoo’s older cousin (AOL was founded in 1985).

Armstrong could take all that Yahoo traffic, merge it with AOL traffic, smoothly integrating verticals (Yahoo Finance and AOL Finance, Yahoo Sports and AOL Sports, etc.) and make more per digital page than Marissa Mayer could.

So for Verizon, it’s more than a size play; it’s a tech play. How much can Tim Armstrong really juice out of Yahoo audience? Take that projected number, and you’d know how much Verizon is really to pay for Yahoo.

Re-Write Land

Yahoo News? The two words together seemed confusing early on. Was the news written on that Yahoo portal by or just sent through Yahoo? Was it distributing newspaper- and magazine-written stories or employing people to write its own?

Over the years, Yahoo zigged and zagged on that question. It has hired both the tops in their fields (Katie Couric and David Pogue) for example and, at times, veteran and high-regarded newsies. Yet, the original content has always been an uncertain business, for Yahoo execs and for its many readers.

Now, as Yahoo’s media properties go elsewhere, will Yahoo’s distribution strength become its main go-forward asset; will more expensive content origination, already cut back, be a significant part of the mix?

The Midwest of the Internet

So, we know Yahoo is big, but exactly who is in its audience(s)?

My favorite description is one that’s probably half-right. In talking with deal-making cognoscenti, a couple offered one contrarian would be-buyer for Yahoo: Meredith. The company that started as Des Moines-based, Midwestern-pleasing magazine company continues to grow and grow. Ahead of the curve, it moved away from a print magazine branding to announcing itself as the leading’s women’s marketing company in the country, and then backed that up, as an early inventor of what we now know as branded content. Meredith figured out how to serve middle American, middle-class, largely between-the-coasts women to advertisers.

Much of Yahoo’s audience now matches that positioning, several insiders have told me. Yahoo’s readership skews older, more female and more between-the-coasts than many major web brands, they say. Of course, that metaphor may only go far. Yahoo Finance and Yahoo Sports serve as the two highest-ranking Yahoo properties up for sale, and both those topics tend to skew male.

(Yahoo Mail, that legacy of a legacy, akin to AOL’s mail and Internet service businesses, certainly skews older – and generates a large amount of that traffic that makes Yahoo a third-place player, though it monetizes poorly.)

While Meredith is an unlikely suitor (having just announced its merger with Media General, and casting its future more greatly in regional TV), still, it’s a tantalizing idea: Declare a concentration on half the American population – and then execute like crazy.

Planet Convergence

I know it’s a pipedream, but wouldn’t be great for Verizon and Time Inc. to team up to buy Yahoo. Then, Yahoo could be finally betrothed to AOL and AOL and Time could be reunited one more time. It would also make quite a new iconic photo.