The Wall Street Journal reported today on the imminent change in the 2001 joint venture agreement between ATT and Yahoo, which is due to expire next year.
Without substantially reciting the article, the essence is this. For the term of the arrangement, ATT has paid Yahoo $250MM/year to gain access to Yahoo's online information and services, hoping these would tip the scales to provide the original co-signatory, SBC, ATT's predecessor, in its quest to compete with high-speed cable delivery of online services.
However, in recent years, Yahoo's competitor, Google, has been paying its partners in similar situations- up to roughly the same $250MM level. For perspective, Yahoo's current annual revenues are roughly $6.43B, and its NIAC is $751MM. Thus, the ATT payment represents about 4% of Yahoo's current annual revenues, and a third of its net income.
Thus, Yahoo's Terry Semel and his managers must be contemplating not only losing this chunk fo high-margin revenue, but probably adding another $250MM of expenses to continue the relationship, resulting in a potential reduction of 66% of Yahoo's net income available to common.
How did Yahoo manage to wind up in this predicament?
Joseph Schumpeter wrote about this risk as long ago as 1926. His central tenet was that high-growth economies and business sectors made for constantly-changing competitive environments. Therefore, businesses were well-advised to innovate and change their competitive situations for themselves, rather than wait and be eviscerated by another company, or some uncontrolled, external influence.
In Yahoo's case, it looks like, since 2001, they've basically been sitting on their collective asses, counting the annual ATT payment, rather than taking a hard look at their unfocused, vulnerable business model.
As I discussed this with my business partner, it became clear what Yahoo's continuing vulnerability is. He described what he thinks Semel's vision of Yahoo is as 'a place to form groups,' or 'a place users go to find groups and information.' The trouble with this is that it is, for the most part, free. I have never paid a dime for any Yahoo service, although I use their portfolio tracking Finance page for my daily portfolio performance monitoring.
What I think Yahoo should have done, back in 2001, is to have immediately retained a few senior consulting partners from McKinsey and Bain to provide the Yahoo senior managers with anecdotal evidence of how other companies survived and prospered in highly-competitive, technologically-oriented business situations, when they had no clear, salient competitive advantage.
My own opinion is that Yahoo should have begun to take the things it is good at, such as information redistribution, presentation, and online groups management, and offered to private-label them to various companies which need these services, but can't get adequate results from their internal IT departments. Online brokerage services came to mind, as my partner and I discussed this. He and I both deplore Schwab's useless online portfolio performance reporting and "analysis," if you can call it that. Why didn't Yahoo provide them with a portal directly taking the Schwab customer to a Yahoo-provided, but Schwab-labeled customizable portfolio performance site/page? Or provide online retail companies with customer group-management facilities cloned from the very large, successful, but free Yahoo Groups offerings?
Such a strategy would cement Yahoo into corporate marketing and customer service functions, while, for once, actually getting paid by someone for what they do. I maintain that, with its largely free services for consumers, Yahoo continues to be the "used car" of internet information providers. It's got no software, hardware, superior search engine, or actual proprietary information for which to charge fees. Thus, I believe its hold on consumer loyalty is tenuous, at best.
Concerning the ATT-Yahoo pact, I don't actually think either company is destined for greatness, or, consistently superior total return performance in the near future. I think ATT is still going to be stuck vending commodity information distribution, while sinking ever more money into a pointless attempt to offer content, as well. As I've written in prior posts here, down that road has always lain failure.
Yahoo is unlikely to do much better, in my opinion. A la Schumpeter, the time for Yahoo to have begun a radical transformation was as soon as it cashed that first $250MM ATT payment back in 2001. By 2004, they could have been well on the way to forging new business directions and growing new fee-for-services offerings to businesses and consumers. Instead, they are now contemplating a new hole in their income statement, and even the potential loss of the ATT relationship, in its entirety.
Don't be surprised if this is the beginning of the end for Yahoo as a separate, publicly-held entity.
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