Yesterday, Think Equity suggested that fears over the AT&T/Yahoo! deal were overdone:
TE Internet William Morrison thinks the Street is over-estimating the potential hit from the loss of the current AT&T deal, which provides per-subscriber revenue for their jointly marketed Internet access service. He says that some Street estimates put the revenue at risk from Yahoo’s broadband access business at $300 million to $600 million. But he contends that the AT&T deal generates only $200 million in annual revenue now out of an estimated total $275 million total access business.
I am curious, seeing how so many business development deals lead to corporate development deals and vice-versa, I wonder if this round of negotiations will set the stage for a potential inquiry from AT&T about an outright acquisition of Yahoo!
Bear in mind that every time we consider Yahoo!’s many options, which include:
- status quo
- merger with eBay
- acquisition by/merger with Microsoft
- taken private
- can Google buy Yahoo!
Someone comes along and wonders if AT&T (or Comcast) will make a move for Yahoo! I personally think Yahoo! can do just fine by itself, but while $35B in market capitalization is rich for many firms (Walt Disney, Comcast, Time Warner, eBay, News Corp., Viacom, CBS), for a behemoth like AT&T it is not.
AT&T is worth a cool $250B, or 8x Yahoo!’s market cap.
AT&T’s valuation is in the same ball park as Microsoft’s, the other main party usually called on to eventually make a serious run at Yahoo!.
MSFT’s market value is an impressive $330B, or 10x Yahoo! The reason why I think Yahoo! and AT&T would both fancy owning Yahoo! is because once upon a time, Google was worth 1/8th and 1/10th of AT&T and MSFT respectively, but today Google is worth $200B, or 80% of AT&T and 67% of MSFT. I know what you’re thinking: Google is in ascendancy whereas Yahoo! is not. Well, not so fast there. If you consider the fact that display advertising is set to accelerate in 2008 and Yahoo! will benefit most, and a number of other variables such as Google plateauing in search advertising, then you have to adhere to Warren Buffett’s mantra of buying where you get a margin of safety. Say what you want, but buying Yahoo! at a market cap of $35B is closer to “buy low, sell high” than buying Google at a market cap of $200B, no?
This begs the question: can AT&T actually buy Yahoo! $35B is a lot of money.
AT&T only has $2B in cash on its books, whereas MSFT has $20B. But AT&T carries some $60B in debt and is as such no stranger to debt. MSFT has little, if any debt.
But MSFT generated less than $60B in revenues whereas AT&T clocked in $100B in revenue. Any way you dice it, AT&T can underwrite an acquisition of Yahoo! if it wanted to. AT&T is also looking at moving into web and video more, and clearly, no one is as well positioned for those two areas as Yahoo!
Of course, then it’s a matter of will Yahoo! shareholders approve the deal?
Disclaimer: Long YHOO
Digg this Blog
Share on Facebook
WatchMojo on Twitter
WatchMojo on YouTube
Add to Favorites
WatchMojo NewsletterThis morning 5Min announced a $5M series A round from Spark Capital - who have also invested in video content network Next New Networks. Spark Capital is one of the few pro-media, pro-content VC firms out there. They’re certainly going against the grain when it comes to what VCs are looking for traditionally. In fact, Spark Capital is one of the few who actually reinforced my theory that VCs will start to invest in video content startups because:
- there has been an over-investment in video file sharing video networks and video ad networks
- distribution has become commoditized and content can scale pretty easily and quickly thanks to things like RSS and trends like deportalization.
But what else does this investment news signal?
How To Video Landscape is Cluttered, Competitive and Not Very Differentiated
First off, the how to video landscape is very cluttered. When we launched WatchMojo.com in January 2006, doing how to videos was the obvious thing. As New Tee Vee’s Liz Gannes points out:
How-to video sites make a lot of sense. Video is often a far better way to demonstrate how to do something than text or audio. And then there’s the business side; viewers seeking out video are expressing interest in a specific topic, meaning they are ripe targets for advertisers.
I agree about the first, let’s test the second part later on. While demand for how to videos seemed obvious, what became even more obvious was that there was a plethora of well-funded and entrenched players. Again, quoting Gannes:
5min CEO Ran Harnevo and his investors are portraying themselves as underdogs compared to competitors like VideoJug and ExpertVillage, which have ample cash reserves. More than ample, actually. VideoJug has at least $30 million in funding, and ExpertVillage was recently bought by Demand Media, which has $320 million in funding. Other competitors include Scripps Howard’s DIY Network, MAKE’s Weekend Projects podcast, SuTree, iAmplify, the pre-launch Howcast and the recently merged Zipidee and TotalVid.
Very quickly, we decided to alter our game plan and steered away from becoming too how-to oriented. Sure, we have our share of how to videos in our library of 4,000 clips, but they are really just one small part of the archive. More importantly, we decided to adopt a more infotainment angle for them. For example, our How to Tie a Video Clips are light-hearted and basically entertaining. But, they do the trick. This New Year’s Eve I used Sylvia’s tips here to tie my first ever Windsor knot.
Two Sides of the Spectrum: Informational vs. Entertaining
This is an especially important component. Gannes mentioned “viewers seeking out video are expressing interest in a specific topic, meaning they are ripe targets for advertisers” I actually disagree. When I served as VP of Ad Sales in my old life, I realized that advertisers wanted to juxtapose brands next to hip content, not too informational. This is partially why, I think, marketers advertise in magazines and not encyclopedias and dictionaries (I know, I doubt the latter would run ads, but you know what I mean).
I am biased, since my background was working for a online lifestyle magazine, but I don’t think most marketers like to advertise in content that is too informative. It’s almost like they are admitting that their brands appeal to people who don’t have a clue. I now this sounds harsh, but I am biased. Everything we do has a lifestyle angle.
Pick and Choose Your Battles
As a user, I think it’s great to see more startups vying for supremacy in the how-to space.
How To Videos are both hard and easy to pull off:
- Why a Content Strategy Around How To Video Is Easy: it’s the lowest hanging fruit in the video landscape (from a level of difficulty to pull off) because you need the least amount of storytelling capability. The danger in How To Videos is that there are eerily very little barriers to entry.
- Why a Content Strategy Around How To Video Is Hard: Obviously, this requires some know-how and expertise, which is not always obvious.
Enter the User-Generated Content Variable
I have always been highly cynical of UGC’s ability to win ad dollars. YouTube (we’re a content provider on YouTube) is proof of that. Despite the $1.65B price tag, in 2006, YouTube generated $15M in ad dollars even though its inventory suggested that it could do at least $7.5M per month according to our numbers then.
Anyway, despite my belief that UGC is loser generated content in advertisers’ eyes, I think that How To videos are conceivably the only category where UGC works in consumers’ eyes… which means that 5Min can probably compete against Video Jug, but Expert Village too is UGC-based… so regardless of 5Min’s management’s spin, it will be hard for them to really make a dent in the space.
Not Lumping All Video Content in Same Basket
What this is showing, more than anything else, is that video content is starting to evolve and the sub-segment is blooming. The first sites displayed UGC of all kinds (think America’s Funniest Videos), you are now seeing the maturing of the How To Space for the reasons we outlined above… the next wave - if I dare make this prediction - is that you will see more and more storytellers migrate to the Web and create businesses around their video content (storytelling as opposed to demonstrating, which is what how to videos are).
Overall, this is a great sign that VCs are seeing value in video content… though I remain doubtful that How To’s are the most valuable kind of content, because the barriers to entry are quite low, as evidenced by the cornucopia of players that 5Min will be taking on. In fact, last year HowCast garnered some buzz, but then it failed to launch in time. and subsequently merged with Zipidee and TotalVid merged, part of the reason for the consolidation was probably that the landscape for a tad too cluttered.
As far as 2008 goes, make it 3 for 3 for Yahoo! The markets were closed on January 1, so Yahoo! was spared any bad news. On January 2 AT&T’s potential impact on Yahoo! was said to be overblown, according to Think Equity (and we suggest maybe a precursor to M&A talks between AT&T and YHOO).
Then today, January 3, JP Morgan’s Imran Khan published a bullish report on display advertising with Yahoo! benefiting most thanks to its entrenched position as well as its Right Media acquisition:
JP Morgan is forecasting the U.S. graphical ad market to hit nearly $8.6 billion this year–a 20% increase from 2007, with much of that cash flow being driven by costlier CPMs.
What’s going to fuel the price spike? According to analyst Imran Khan, the 4% growth in CPMs will stem from a cocktail of factors, including less abundant (and possibly devalued) offline inventory, improvements in behavioral and geographical targeting, and the increased use of ad exchanges.
(…)
We expect newspapers to continue to bleed circulation and ad revenues to the Web.
Meanwhile, Web publishers will get better at monetizing their inventory via improved targeting, migration to ad exchanges and sites like social networks increasing the number of ads per page. In 2007, some 83% of graphical inventory was sold for less than $1/CPM, according to Khan–so if a publisher improves its yield even by a few cents, it can have a tremendous impact on revenues.
Khan and other analysts on JP Morgan’s U.S. Equity Research Internet team gave their bullish predictions for the display market during Wednesday’s 2008 Global Internet Outlook conference call, and named Yahoo as one of the “greatest beneficiaries of improved graphical advertising trends.“
MSN, AOL and CNET were also included as winners in the buoyant display market, but Khan went so far as to peg Yahoo as the leader in 2008–forecast to snag 10% of the $20 billion global graphical ad market. MSN is slated to snag roughly 7.2%, while AOL and CNET will own 5% and about 2% of the global display market, respectively.
According to the report, much of Yahoo’s success with display ads in 2008 hinges on whether the Web giant can effectively leverage the Right Media ad exchange and ramp up a number of strategic partnerships–with said partnerships possibly adding $100 million to Yahoo’s network revenue over the year.
According to Media Post. Now a few things to point out in all of this:
- We just published a post on whether Yahoo! should spin off its network unit, read that here.
- We’ve long remained bullish - and are currently long - on Yahoo! specifically for these reasons.
- Most shocking - though not really - is that 83% of display ad inventory sold for less than $1.
