The 4 Reasons Verizon Should Buy Yahoo

The 4 Reasons Verizon Should Buy Yahoo

Verizon tipped its hand that it would be interested to buy Yahoo back in December.  In the last few days this possibility drew more attention as Verizon’s CFO confirmed interest on CNBC, and Bloomberg reported that AOL’s CEO Tim Armstrong is investigating a potential acquisition.  There are some very good reasons this deal makes sense:

AOLHooFirst, this acquisition has the opportunity to make Verizon distinctive.  Think about all those ads you see for mobile phone service.  Pretty much alike.  All of them  trying to say that their service is better than competitors, in a world where customers don’t see any real difference.  3G, 4G – pretty soon it feels like they’ll be talking about 10G – but users mostly don’t care.  The service is usually good enough, and all competitors seem the same.

So, that leads to the second element they advertise – price.  How many different price programs can anyone invent?  And how many phone or tablet give-aways.  What is clear is that the competition is about price.  And that means the product has become generic.  And when products are generic, and price is the #1 discussion, it leads to low margins and lousy investor returns.

But a Yahoo acquisition would make Verizon differentiated.  Verizon could offer its own unique programming, at a meaningful level, and make it available only on their network.  And this could offer price advantages.  Like with Go90 streaming, Verizon customers could have free downloads of Verizon content, while having to pay data fees for downloads from other sites like YouTube, Facebook, Vine, Instagram, Amazon Prime, etc.  The Verizon customer could have a unique experience, and this could allow Verizon to move away from generic selling and potentially capture higher margins as a differentiated competitor.

Second, Yahoo will never be a lead competitor and has more value as a supporting player.  Yahoo has lost its lead in every major competitive market, and it will never catch up.  Google is #1 in search, and always will be.  Google is #1 in video, with Facebook #2, and Yahoo will never catch either.  Ad sales are now dominated by adwords and social media ads – and Yahoo is increasingly an afterthought.  Yahoo’s relevance in digital advertising is at risk, and as a weak competitor it could easily disappear.

But, Verizon doesn’t need the #1 player to put together a bundled solution where the #2 is a big improvement from nothing.  By integrating Yahoo services and capabilities into its  unique platform Verizon could take something that will never be #1 and make it important as part of a new bundle to users and advertisers.  As supporting technology and products Yahoo is worth quite a bit more to Verizon than it will ever be as an independent competitor to investors – who likely cannot keep up the investment rates necessary to keep Yahoo alive.

Third, Yahoo is incredibly cheap.  For about a year Yahoo investors have put no value on the independent Yahoo.  The company’s value has been only its stake in Alibaba.  So investors inherently have said they would take nothing for the traditional “core” Yahoo assets.

Additionally, Yahoo investors are stuck trying to capture the Alibaba value currently locked-up in Yahoo.  If they try to spin out or sell the stake then a $10-12Billion tax bill likely kicks in.  By getting rid of Yahoo’s outdated business what’s left is “YaBaba” as a tracking stock on the NASDAQ for the Chinese Alibaba shares.  Or, possibly Alibaba buys the remaining “YaBaba” shares, putting cash into the shareholder pockets — or giving them Alibaba shares which they may  prefer.  Etiher way, the tax bill is avoided and the Alibaba value is unlocked.  And that is worth considerably more than Yahoo’s “core” business.

So it is highly unlikely a deal is made for free.  But lacking another likely buyer Verizon is in a good position to buy these assets for a pretty low value.  And that gives them the opportunity to turn those assets into something worth quite a lot more without the overhang of huge goodwill charges left over from buying an overpriced asset – as usually happens in tech.

Fourth, Yahoo finally gets rid of an ineffectual Board and leadership team.  The company’s Board has been trying to find a successful leader since the day it hired Carol Bartz.  A string of CEOs have been unable to define a competitive positioning that works for Yahoo, leading to the current lack of investor enthusiasm.

The current CEO Mayer and her team, after months of accomplishing nothing to improve Yahoo’s competitiveness and growth prospects, is now out of ideas.  Management consulting firm McKinsey & Company has been brought in to engineer yet another turnaround effort.  Last week we learned there will be more layoffs and business closings as Yahoo again cannot find any growth prospects.  This was the turnaround that didn’t, and now additional value destruction is brought on by weak leadership.

Most of the time when leaders fail the company fails.  Yahoo is interesting because there is a way to capture value from what is currently a failing situation.  Due to dramatic value declines over the last few years, most long-term investors have thrown in the towel.  Now the remaining owners are very short-term, oriented on capturing the most they can from the Alibaba holdings.  They are happy to be rid of what the company once was.  Additionally, there is a possible buyer who is uniquely positioned to actually take those second-tier assets and create value out of them, and has the resources to acquire the assets and make something of them.  A real “win/win” is now possible.

 

Why Small Business Leaders are Missing the Digital/Mobile Revolution

It is an unfortunate fact that small businesses fail at a higher rate than large businesses.  While we've come to accept this, it somewhat flies in the face of logic.  After all, small businesses are run by owners who can achieve entrepreneurial returns rather than managerial bonuses, so incentive is high.  Conventional wisdom is that small businesses have fewer, and closer relationships to customers (think Ace Hardware franchisees vs. Home Depot.)  And lacking layers of overhead and embedded management they should be more nimble.

Yet, they fail.  From as high as 9 out of 10 for restaurants to 4 out of 10 in more asset intensive business-to-business ventures.  That is far higher than large companies.

Why?  Despite conventional wisdom most small businesses are run by leaders committed to a single, narrow success formula.  Most are wedded to their core ideology, based on personal history, and unwilling to adapt until the business completely fails.  Most reject new technologies and other emerging innovations as long as possible, trying to conserve  cash and wait for "more proof" change will pay off.  Additionally, most spend little time investing time, or money, in innovation at all as they pour everything into defending and extending their historical business approach. 

Take for example the major trend to digital marketing.  Everyone knows that digital is the only growing ad market, while print is fast dying:
Digital vs Print ad spending 3-2013
Chart republished with permission of Jay Yarow, Business Insider 3/19/2013

Yet AdWeek reported a new Boston Consulting Group study reveals that a mere 3% of small business ad dollars are in digital!

Digital marketing is one of the few places where ads can be purchased for as little as $100.  Digital ads are targeted at users based upon their searches and pages viewed, thus delivered directly to likely buyers.  And digital ads consistently demonstrate the highest rate of return.  That's why it's growing at over 20%/year!

Yet, small businesses continue to put most of their money into local newspapers and direct mail circulars.  The least targeted of all advertising, and increasingly the least read!  While print ad spending has declined over 80% the last few years, to 1950 levels (adjusted for inflation,) smarter businesses have abandoned the media.  At large companies in 2012 38% of advertising is on digital, second only to TV's 42% – and rapidly moving into first place!

A second major trend is the move to mobile and app usage.  In the last 2 years mobile users have grown and shown a distinct preference for apps over mobile web sites.  App use is growing while mobile web sites have stalled:
Apps v mobile web 3-2013
Chart republished with permission of Alex Cocotas, Business Insider 3/20/13

Even though there are over 1million apps available for iPhone and Android users, the vast majority of small businesses have no apps aligned with their business and customers.  Most small businesses, late to the game in digital marketing, are content to try and add mobile capability to their already existing web site – hoping that it will be sufficient for future growth. Meanwhile, customers are going directly for apps in accelerating numbers every month!
Number of app downloads 1-2018
Chart republished with permission of Alex Cocotas, Business Insider 1/8/13

Rather than act like market leaders, using customer intimacy and nimbleness to jump ahead of lumbering giants, small business leaders complain they are unsure of app value – and keep spending money on historical artifacts (like their web site) rather than invest in higher return innovation opportunities.  Many small businesses are spending $20k+/year on printed brochures, coupons and newspaper or magazine PR when a like amount spent on an app could connect them much more tightly with customers, add higher value and expand their base more quickly and more profitably!

The trend to digital marketing – including the explosive growth in mobile app use – is proven.  And due to very low relative up-front cost, as well as low variable cost, both trends are a wonderful boon for small businesses ready to adopt, adapt and grow.  But, unfortunately, the vast majoritiy of small business leaders are behaving oppositely!  They remain wedded to outdated marketing and customer relationship processes that are too expensive, with lower yield! 

The opportunity is greater now than during most times for smaller competitors to be disruptive.  They can seize new innovations faster, and leverage them before larger competitors.  But as long as they cling to old practices and processes, and beliefs about historical markets, they will continue to fail, smashed under the heal of slower moving, bureaucratic large companies who have larger resources when they do finally take action.

 

Why Yahoo Investors Should Worry about Marissa Mayer

Marissa Mayer created a firestorm this week by issuing an email requiring all employees who work from home to begin daily commuting to Yahoo offices.  Some folks are saying this is going to be a blow to long-term employees, hamper productivity and will harm the company. Others are saying this will improve communications and cooperation, thin out unproductive employees and help Yahoo.

While there are arguments to be made on both sides, the issue is far simpler than many people make it out to be – and the implications for shareholders are downright scary.

Yahoo has been a strugging company for several years.  And the reason has nothing to do with its work from home policy.  Yahoo has lacked an effective strategy for a decade – and changing its work from home policy does nothing to fix that problem.

In the late 1990s almost every computer browser had Yahoo as its home page.  But Yahoo long ago lost its leadership position in content aggregation, search and ad placement.    Now, Yahoo is irrelevant.  It has no technology advantage, no product advantage and no market advantage.  It is so weak in all markets that its only value has been as a second competitor that keeps the market leader from being attacked as a monopolist! 

A series of CEOs have been unable to develop a new strategy for Yahoo to make it more like Amazon or Apple and less like – well, Yahoo.  With much fanfare Ms. Mayer was brought into the flailing company from Google, which is a market leader, to turn around Yahoo.  Only she's been on the job 7 months, and there still is no apparent strategy to return Yahoo to greatness. 

Instead, Ms. Mayer has delivered to investors a series of tactical decisions, such as changing the home page layout and now the work from home policy.  If tactical decisions alone could fix Yahoo Carol Bartz would have been a hero – instead of being pushed out by the Board in disgrace. 

Many leading pundits are enthused with CEO Mayer's decision to force all employees into offices.  They are saying she is "making the tough decisions" to "cut the corporate cost structure" and "push people to be more productive." Underlying this lies thinking that the employees are lazy and to blame for Yahoo's failure. 

Balderdash.  It's not employees' fault Yahoo, and Ms. Mayer, lack an effective strategy to earn a high return on their efforts. 

It isn't hard for a new CEO to change policies that make it harder for people to do their jobs – by cutting hours out of their day via commuting.  Or lowering productivity as they are forced into endless meetings that "enhance communication and cooperation." Or forcing them out of the company entirely with arcane work rules in a misguided effort to lower operating costs or overhead.  Any strategy-free CEO can do those sorts of things. 

Just look at how effective this approach was for

  • "Chainsaw" Al Dunlap at Scott Paper
  • "Fast Eddie" Lampert at Sears
  • Carol Bartz at Yahoo
  • Meg Whitman at HP
  • Brian Dunn at Best Buy
  • Gregory Rayburn at Hostess
  • Antonio Perez at Kodak

The the fact that some Yahoo employees work from home has nothing to do with the lack of strategy, innovation and growth at Yahoo.  That failure is due to leadership.  Bringing these employees into offices will only hurt morale, increase real estate costs and push out several valuable workers who have been diligently keeping afloat a severely damaged Yahoo ship. These employees, whether in an office or working at home, will not create a new strategy for Yahoo.  And bringing them into offices will not improve the strategy development or innovation processes. 

Regardless of anyone's personal opinions about working from home, it has been the trend for over a decade.  Work has changed dramatically the last 30 years, and increasingly productivity relies on having time, alone, to think and produce charts, graphs, documents, lines of code, letters, etc.  Technologies, from PCs to mobile devices and the software used on them (including communications applications like WebEx, Skype and other conferencing tools) make it possible for people to be as productive remotely as in person. Usually more productive removed from interruptions.

Taking advantage of this trend helps any company to hire better, and be more productive.  Going against this trend is simply foolish – regardless the intellectual arguments made to support such a decision. Apple fought the trend to PCs and almost failed.  When it wholesale adopted the trend to mobile, seriously reducing its commitment to PC markets, Apple flourished.  It is ALWAYS easier to succeed when you work with, and augment trends.  Fighting trends ALWAYS fails.

Yahoo investors have plenty to be worried about.  Yahoo doesn't need a "tough" CEO.  Yahoo needs a CEO with the insight to create, and implement, a new strategy.  And a series of tactical actions do not sum to a new strategy.  As importantly, the new strategy – and its implementation – needs to augment trends.  Not go against trends while demonstrating the clout of a new CEO. 

If you've been waiting to figure out if Ms. Mayer is the CEO that can make Yahoo a great company again, the answer is becoming clear.  She increasingly appears very unlikely to have what it takes.

The Day TV Died – Winners and Losers (Comcast, Disney, CBS)

Remember when almost everyone read a daily newspaper

Newspaper readership peaked around 2000.  Since then printed media has declined, as readers shifted on-line.  Magazines have folded, and newspapers have disappeared, quit printing, dramatically cut page numbers and even more dramatically cut staff. 

Amazingly, almost no major print publisher prepared for this, even though the trend was becoming clear in the late 1990s. 

Newspapers are no longer a viable business.  While industry revenue grew for
almost 2 centuries, it collapsed in a mere decade.

Newspaper ad spending 1950-2010
Chart Source: BusinessInsider.com

This market shift created clear winners, and losers.  On-line news sites like Marketwatch and HuffingtonPost were clear winners.  Losers were traditional newspaper companies such as Tribune Corporation, Gannett, McClatchey, Dow Jones and even the New York Times Company.  And investors in these companies either saw their values soar, or practically disintegrate. 

In 2012 it is equally clear that television is on the brink of a major transition.  Fewer people are content to have their entertainment programmed for them when they can program it themselves on-line.  Even though the number of television channels has exploded with pervasive cable access, the time spent watching television is not growing.  While simultaneously the amount of time people spend looking at mobile internet displays (tablets, smartphones and laptops) is growing at double digit rates.

Web v mobile v TV consumption
Chart Source: Silicone Alley Insider Chart of the Day 12/5/12

It would be easy to act like newspaper defenders and pretend that television as we've known it will not change.  But that would be, at best, naive.  Just look around at broadband access, the use of mobile devices, the convenience of mobile and the number of people that don't even watch traditional TV any more (especially younger people) and the trend is clear.  One-way preprogrammed advertising laden television is not a sustainable business. 

So, now is the time to prepare.  And change your business to align with impending new realities.

Losers, and winners, will be varied – and not entirely obvious.  Firstly, a look at those trying to maintain the status quo, and likely to lose the most.

Giant consumer goods and retail companies benefitted from the domination of television.  Only huge companies like P&G, Kraft, GM and Target could afford to lay out billions of dollars for television ads to build, and defend, a brand.  But what advantage will they have when TV budgets no longer control brand building?  They will become extremely vulnerable to more innovative companies that have better products and move on fast lifecycles. Their size, hierarchy and arcane business practices will lead to huge problems.  Imagine a raft of new Hostess Brands experiences.

Even as the trends have started changing these companies have continued pumping billions into the traditional TV networks as they spend to defend their brand position.  This has driven up the value of companies like CBS, Comcast (owns NBC) and Disney (owns ABC) over the last 3 years substantially. But don't expect that to last forever. Or even a few more years.

Just like newspaper ad spending fell off a cliff when it was clear the eyeballs were no longer there, expect the same for television ad spending.  As giant advertisers find the cost of television harder and harder to justify their outlays will eventually take the kind of cliff dive observed in the chart (above) for newspaper advertising.  Already some consumer goods and ad agency executives are alluding to the fact that the rate of return on traditional TV is becoming sketchy.

So far, we've seen little at the companies which own TV networks to demonstrate they are prepared for the floor to fall out of their revenue stream.  While some have positions in a few internet production and delivery companies, most are clearly still doing their best to defend & extend the old business – just like newspaper owners did.  Just as newspapers never found a way to replace the print ad dollars, these television companies look very much like businesses that have no apparent solution for future growth.  I would not want my 401K invested in any major network company.

And there will be winners.

For smaller businesses, there has never been a better time to compete.  A company as small as Tesla or Fisker can now create a brand on-line at a fraction of the old cost.  And that brand can be as powerful as Ford, and potentially a lot more trendy. There are very low entry barriers for on-line brand building using not only ad words and web page display ads, but also using social media to build loyal followers who use and promote a brand.  What was once considered a niche can become well known almost overnight simply by applying the new dynamics of reaching customers on-line, and increasingly via mobile.  Look at the success of Toms Shoes.

Zappos and Amazon have shown that with almost no television ads they can create powerhouse retail brands.  The new retailers do not compete just on price, but are able to offer selection, availability and customer service at levels unachievable by traditional brick-and-mortar retailers.  They can suggest products and prices of things you're likely to need, even before you realize you need them.  They can educate better, and faster, than most retail store employees.  And they can offer great prices due to less overhead, along with the convenience of shipping the product right into your home. 

And as people quit watching preprogrammed TV, where will they go for content?  Anybody streaming will have an advantage – so think Netflix (which recently contracted for all the Disney content,) Amazon, Pandora, Spotify and even AOL.  But, this will also benefit those companies providing content access such as Apple TV, Google TV, YouTube (owned by Google) to offer content channels and the increasingly omnipresent Facebook will deliver up not only friends, but content — and ads. 

As for content creation, the deep pockets of traditional TV production companies will likely disappear along with their ability to control distribution.  That means fewer big-budget productions as risk goes up without revenue assurances. 

But that means even more ability for newer, smaller companies to create competitive content seeking audiences.  Where once a very clever, hard working Seth McFarlane (creator of Family Guy) had to hardscrabble with networks to achieve distribution, and live in fear of a single person controlling his destiny, in the future these creative people will be able to own their content and capture the value directly as they build a direct audience.  A phenomenon like George Lucas will be more achievable than ever before as what might look like chaos during transition will migrate to a much more competitive world where audiences, rather than network executives, will decide what content wins – and loses.

So, with due respects to Don McLean, will today be the day TV Died?  We will only know in historical context.  Nobody predicted newspapers had peaked in 2000, but it was clear the internet was changing news consumption behavior.  And we don't know if TV viewership will begin its rapid decline in 2013, or in a couple more years. But the inevitable change is clear – we just don't know exactly when.

So it would be foolish to not think that the industry is going to change dramatically.  And the impact on advertising will be even more profound, much more profound, than it was in print.  And that will have an even more profound impact on American society – and how business is done. 

What are you doing to prepare?

 

 

Buy Facebook Now – Catch a lucky break!

On May 18 Facebook went public with an opening price of $38/share.  Now, after just 2 weeks, it's more like $28.  Ouch – a 25%+ drop in such a short time makes nobody happy.  Except buyers.  And if you are interested in capturing a high rate of return with little risk, this is your lucky break!

The values of publicly traded companies change, often dramatically, based upon changes in performance and investor expectations about the future.  Trying to profit off fast price changes is the world of traders – and the vast majority of them lose fortunes rather than create them.  Knowing how to ignore whipsaw events, and invest in good companies when they are out of favor is important to long-term wealth creation. 

Investors make money by understanding product markets and the companies supplying them, then investing in companies that build upon trends to create revenue growth with high rates of return over several years.  In the forgettable 1999 movie "Blast from the Past" (Brendan Fraser, Christopher Walken, Sissy Spacek) a family moves into its nuclear blast shelter in 1960 during a panic, and doesn't come out for 35 years.  Fortunately, the father had bought shares of AT&T and other companies aligned with 1960 trends, and the family discovers upon re-emergence it is quite wealthy. 

Creating investment wealth means acting like them, buying shares in companies building on trends so you can hold shares for years without much worry.

If ever there was a company aligned with trends, it is Facebook.  The company did not create 900million users in 8 years by being lucky.  Facebook is the ultimate information era company.  Facebook is not a fad – any more than television or telephones were fads in 1960.  Just like they provided fundamental new ways of acquiring and disseminating information Facebook is the newest, most efficient and effective way for connecting and communicating in 2012.

When television appeared the mass population said "why?" There was radio, which was cheap, and older users said TV reduced the use of imagination.  And television was not available many hours per day.  But it didn't take long for CBS and its brethren to prove it could attract eyeballs, and soon Proctor & Gamble started paying for programming so it could promote its soaps (remember "soap operas?") Soon other companies developed programs strictly so they could promote their products. The "Ted Mack Amateur Hour" was sponsored by Geritol, and viewers were reminded of that over and over for 30 minutes every week.  Eventually the TV ad model changed, but the lesson is clear -  when you can attract eyeballs it has value and there will be businesses creative enough to take advantage.

Now television watching is declining.  Instead, people are spending more time on the internet – including via mobile devices.  And the location attracting the most people, and by far for the most minutes per day, is Facebook.  Facebook's access to so many people, so often, creates an audience many businesses and non-profits want to tap. 

Further, in the networked world Facebook not only has eyeballs, it delivers up to those eyeballs some 9 million apps, and knows what everyone wants, where they come from and where they go next.  Beyond the industrial-era business of selling ads (like Google,) Facebook's information business has significant value for anyone trying to promote or sell a solution.  Facebook is a repository of information about people, and their behavior, never before seen, understood or developed for use.

Around the IPO, General Motors decided to drop its  Facebook advertising.  That freaked some investors.  Cries arose that social media is somehow broken, and unable to develop a business model. 

Let's keep in mind who we're talking about here – GM.  Not the most innovative, forward thinking company, to put it mildly.  GM, like a lot of other plodding, but big spending, large companies has approached social media like it is just television on the web – and would prefer to simply put up a television ad on a Facebook like link.  Whoa! That would be akin to a 1960s TV ad that was simply the text from a newspaper ad.  Nobody would read it, and it simply wouldn't work. 

Television required a new kind of communication to reach customers – and social media does as well.  TV required the ad be entertaining, with movement, product use demonstrations, and video plus audio to go with the words.  Connecting with users was harder, but the message (and connection) could be far more robust.  And that is what advertisers are being forced to learn about Facebook/Social.  It has new requirements, but once understood companies can be remarkably successful at connecting with potential customers – far more than the traditional one-way approach of historical advertising.

Paid promotion on Facebook is just the tip of the iceberg – a one-way approach to advertising sure to create short-term revenue but not terribly robust.  Beyond that, social media changes everything. Retail, for example, is fast shifting from pushing inventory to being all about understanding the customer and offering them what they need in an anticipatory way (think Amazon rather than Best Buy.)  And nowhere can you better understand customer needs than by social media participation.  By being an information company, rather than an industrial company, FB is remarkably well positioned to create growth – for everybody that figures out how to use this remarkable platform.

As Facebook's shares kept falling this week, more attention was paid to whether traditional advertisers would buy FB.  And much was made about whether the "metrics" were there to justify social media investments.  This micro-management approach clearly misses the main point.  People are already on Facebook, their numbers are growing, their uses are growing, their time on the site is growing, and the benefits of using Facebook are growing.  Trying to measure Facebook use the way you would measure a print ad – or even a Google Adword buy – is simply using the wrong tool.

When P&G first started producing television "soaps" their competition sat back and said "look at what television advertising costs, compared to print and compared to pushing products into the local stores.  What is the return for each of those television shows?  Can it be justified? I think it is smarter to keep doing what we've done while P&G throws money at ads you can't measure."  By moving beyond the historically myopic view of trying to find returns at the micro level P&G quickly became (at the time) the world's largest consumer goods company.  Early TV advertisers followed the trend, knowing their participation would create returns far in excess of doing more of the old thing. And that is the direction of social media.

There was a lot of anticipatory excitement for the Facebook IPO.  Lots of people wanted shares, and couldn't buy them in advance.  The public, and the Morgan Stanley investment bankers, clearly thought the shares would go up.  Oops.  But that's a lucky thing for investors. Especially small investors, usually unable to participate in a "hot" IPO.  Now anybody can buy FB shares at a 25% discount to the offering price – a better deal than the institutional buyers that usually get the "sweet" deal little guys never see. 

If you are an employee, short term you might be unhappy.  But if you are an investor, be happy that worries about Greece, the Euro's future, domestic politics, a lousy jobs report and simple myths like  "sell in May and go away" have been a drag on equities this month – and diminished interest in Facebook. 

Buy FB shares, then forget about them for a while.  What you care about isn't the value of FB shares in 4 days, 4 weeks or 4 months – you care about 4 years.  If you missed the chance to buy Microsoft in 1986, or Amazon in 1997, or Apple in 2000, or Google in 2004 then don't miss this one.  There will be volatility, but the trends are all in your favor.