Net Additions versus Net Ads

As Verizon retreats from content, should carriers stay in their lanes?

Several years ago, when Verizon began assembling media assets to compete in the advertising sector, its strategy seemed sound. With a significant number of smartphone users in its customer set, the carrier hoped the move would allow it to compete for attention with the likes of Facebook and Google. Verizon knew its subscribers: it knew the who, when and where of a large portion of the US population at any given time.

When Verizon acquired AOL in 2015 and Yahoo about a year later to create what was to become Verizon Media, the wireless carrier brought together the tools it needed to enter the digital advertising business. AOL had matured away from its “you’ve got mail” legacy, developing the skills to target digital ads at individual users. AOL was also in the content business, owning sites such as HuffPost and TechCrunch as well as creating original content.

Yahoo had also grown beyond its original roots when Verizon swooped in. Although it wasn’t the company it was in its prime, when Verizon took over Yahoo still mattered in the digital world. In fact, by some accounts, sites and services operated by Yahoo generated more traffic than Google.

Recent reports that Verizon is selling its media unit weren’t a complete surprise. It had been rumoured for several years that the carrier was interested in getting back to its roots of cellular communication, particularly as it was building out its next-generation network under new CEO Hans Vestberg. In late 2018, it wrote down the value of Oath — the name for its media unit at the time — as $4.5 billion. And in January 2019, Verizon reportedly began a 7% staff reduction at its media unit, equivalent to about 800 jobs (see Instant Insight: Verizon Results, 4Q18).

The $5 billion that Verizon will receive from private equity firm Apollo Global Management is about half of what it paid to pull together its media unit. This is an expensive lesson that other wireless carriers can learn from. When you’re serving subscribers with connectivity as well as ads, it’s a complicated matter to maintain trust and security.

Verizon is now focussing on growth by maintaining customers and gaining new ones, rather than through digital advertising. To put things simply, net additions are more critical than “net ads” for Verizon. The carrier is turning its focus to what it does best.

Yahoo says that it will continue to work with advertisers and with Verizon to offer a sophisticated advertising platform, which is likely to mean expanding deals with other carriers.

The strategy to acquire digital assets was once common among many of the world’s telecom companies as they fought being pigeonholed as “dumb pipes”. Rather than just connecting subscribers to content, operators aimed to build out the relationship with their customers, generating revenues beyond the access technologies. For example, Verizon’s rival AT&T took an even deeper plunge into investing in content, through its colossal $85.4 billion acquisition of Time Warner in 2016.

Vertical integration isn’t a bad strategy, but there’s a track record developing among carriers that shows it’s not as easy as snapping together digital ads with digital access. Carriers have lots of data, but monetizing said data could be tricky.

Other carriers are also reassessing their priorities. In 2020, AT&T began to field bids for much of its digital-ad business formerly known as Xandr. The unit, which includes operations from the AppNexus digital ad exchange that was acquired for $1.6 billion in 2018, hasn’t lived up to expectations.

And in the UK, BT said last month that it’s considering selling part of its BT Sport business as it focusses on accelerating deployment of its fibre broadband network (see Instant Insight: BT Discusses Future of BT Sport). Like many telecom operators, it faces a dilemma: does it sharpen its focus on fixed-line and mobile networks to attempt to offer the best connectivity in the sector amid questionable long-term return, or place bold risks on new revenue from adjacent areas such as sport? The company’s decision over the future of BT Sport will give a strong clue as to where its priorities lie.

As for Verizon, it’s getting back into the fast lane of connectivity.