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How Verizon’s $9bn media bet became virtually worthless

When Verizon bought AOL in 2015 and a year later Yahoo, many observers questioned why America’s largest phone company would want to buy two internet dinosaurs.

Two years later those sceptics have been proven correct, as the move turned out to be a $9bn mistake.

Verizon has now written off $4.6bn for its ill-timed foray into digital media. In an SEC filing on Tuesday, Verizon admitted its flagship media brand, Oath— which AOL pioneer Tim Armstrong had predicted would become “the best consumer media company” — is nearly worthless. Lowell McAdam, the Verizon chief executive who had overseen these big bets, left at the end of July this year. 

Two years ago Mr Armstrong had sold Mr McAdam on the idea of combining Yahoo and AOL, two stalwarts of the 1990s, into a contemporary online media empire. Betting that Yahoo and AOL, which had been among the biggest victims of the blistering pace of digital change, could together stop Google’s rise was always going to be “challenging”, said Brian Wieser, analyst at Pivotal Research. “To think otherwise you would have to be woefully optimistic,” he said. 

Mr Armstrong’s timing could not have been worse. At that red-hot moment, digital media companies such as BuzzFeed were attracting billions in investments at lofty valuations. A boom in online advertising had led many to herald a new era for technology and media companies, drawing the eye of traditional giants such as Disney and Verizon. 

Verizon showed poor judgment in buying Yahoo when it did. If Mic was a whimper, the Oath announcement is the bang

That enthusiasm was soon to cool. By late 2017 BuzzFeed, the darling of online media, was missing its revenue targets. Pain has only spread across the sector as the steady dominance of Google and Facebook makes life difficult for companies that rely on advertising. The results have been clear: lay-offs and slashed valuations for brands including Mic, Vox, Vice and Mashable, and the outright shutdown of sites such as Rookie. To offset the stalled advertising sales, BuzzFeed is selling cookware to Walmart and opening a toy store in New York. 

“The peak was two years ago,” said Ken Doctor, analyst at Newsonomics. “Verizon showed poor judgment in buying Yahoo when it did. If Mic was a whimper, the Oath announcement is the bang.” 

The admission of failure on Tuesday prompted finger-pointing as to who had produced a deal that many thought was doomed from the start. John Legere, the outspoken chief executive of T-Mobile, which has snatched customers away from Verizon and AT&T with cheap phone plans, was quick to claim that he had “been telling Verizon for years” the deal was a mistake. “In fact, I told them the day they bought those 90s relics,” he crowed on Twitter. 

Verizon was advised by LionTree and Guggenheim when it acquired AOL and Yahoo.

A rival New York-based investment banker said Verizon’s advisers should have stopped the telecoms company from buying the two assets. However, another adviser said it was unfair to criticise the bankers as Verizon failed to execute on a deal that on paper could have helped create new revenue streams for Verizon. 

Erik Gordon, a professor at the University of Michigan’s Ross School of Business, said bankers could not stop a determined chief executive from doing a poor deal. “The days of bankers being powerful enough to dissuade a CEO from doing what the CEO wants to do are a historical footnote,” said Mr Gordon. 

Verizon executives believed that the advertising world was desperate for a third player to counter the heft of Google and Facebook. They also believed that the company could become that third force, arguing that Verizon could use the data it had on more than 100m Americans to better target ads at consumers.

But Mr Armstrong was never able to execute on these ambitions, and Verizon’s management remained focused on the much larger subscription phone business over the Oath business, which has made up only about 5 per cent of Verizon’s sales.

Google and Facebook’s grip on the advertising market has remained strong. In 2018, the two companies accounted for 57.7 per cent of all digital ad spending in the US, compared with 57.2 per cent in 2016, according to eMarketer. In that same timeframe, Oath’s share of online advertising grew from 1.7 per cent to just 3.3 per cent. 

Along with Oath, former chief executive Lowell McAdam made other attempts at pushing into Hollywood and the media business. In 2015 he unveiled go90, a mobile video platform that aimed to become Verizon’s own YouTube. After a splashy launch hosted by Kanye West, Verizon financed short films for the service, such as Kobe Bryant’s Dear Basketball, which won an Oscar. But go90 never caught on, amid a sea of online videos available on YouTube, Facebook, Instagram, Snapchat and Netflix. Mr McAdam eventually admitted that go90 had been “overhyped”, and new chief executive Hans Vestberg this year scrapped the business. 

Mr Vestberg does not share Mr McAdam’s appetite for building a media empire. He has largely abandoned these experiments in favour of doubling down on what Verizon has historically done best: mobile phones. Faced with the dilemma of what to do about Oath, Mr Vestberg considered a spin-off, but instead folded it into Verizon to stem the losses. As part of the change Mr Armstrong lost his autonomy over Oath, leading to his exit from the company. 

Verizon’s failure in media also raises questions about the prospects for AT&T, which has jumped in headfirst with its blockbuster purchase of Time Warner. 

“Telcos have tended to look at what someone else is doing as a guide to what they should be doing. You could argue that when Verizon bought it they just needed a good story to show that they get digital,” said Mr Wieser.

A former Time Warner executive said that there were acute fears among current employees at the US media company that AT&T risked destroying its value in the process of integrating the two companies. 

“Telecom companies just don’t get media,” said the former company executive, who asked not to be named. “AT&T is more like a government-run company, it lacks the creativeness of a media company . . . many expect similar writedowns there.”

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