Two turkeys (and a telecom) do not make an eagle. (With apologies to Vic Gundotra.)
That line is a bit of a cliché in the tech world, but it conveys a sense of the challenges facing Verizon as it embarks on a strategy to combine Yahoo's internet business, which the telecom giant is set to purchase for $4.8 billion, with AOL, in an effort to gain a foothold in the fast-growing online advertising market.
Yahoo and AOL are seminal companies in the history of the World Wide Web, online pioneers that helped define the first stage of the Web's explosive growth. But these firms were long ago eclipsed by Google, which built (and monetized) a better Web search mousetrap, and Facebook, which dominates the online social networking ad market.
It's no secret that Verizon has ambitions to become a major player in the online, and especially mobile, advertising market. It's a logical move for the nation's largest wireless provider, which has been de-emphasizing its traditional wireline business and looking for new areas of growth as the mobile service market becomes increasingly saturated.
Lowell McAdam, Verizon Chairman and CEO, said in a statement that the Yahoo deal will "put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising."
Verizon plans to integrate Yahoo's internet business with AOL, which the telecom giant bought last year for $4.4 billion. This combination has been a long time coming: Wall Street has been trying to pair up Yahoo and AOL for years.
There's a certain logic to Verizon's strategy, because as Craig Moffett, a telecom analyst at MoffettNathanson, pointed out on CNBC Monday morning, AOL is essentially an ad tech platform, Yahoo is a content platform, and Verizon has a giant trove of customer data about its 140 million wireless users.
The problem facing Verizon is that the online advertising space has become dominated by a pair of internet giants—neither of which is named AOL or Yahoo—that have developed a stranglehold on the bulk of the market.
"The challenge that Verizon is going to have in the future is that online advertising has become a duopoly" controlled by Google and Facebook "and that concentration has been rising over time," Mark Mahaney, a tech analyst at RBC Capital Markets, told CNBC on Monday morning.
Once Verizon has merged AOL and Yahoo, Mahaney added, the result will be a "combined asset that will still amount to maybe a high single-digit percentage of all ad revenue out there, and it's a flatlining or even a declining percentage. That's the real uphill battle."
In 2015, Google and Facebook accounted for 64% of all online advertising revenue, according to data from Pivotal Research analyst Brian Wieser cited by Bloomberg.
Colby Synesael, a tech analyst at Cowen and Company, said his concern is that "digital media/advertising are not areas that Verizon has historically focused on and thus it's difficult to assume the company will be able to find success."
"Even with this transaction, according to eMarketer the company will control just 5.2% of the $69B US digital ad market, including Yahoo's 3.4% share and AOL's 1.8% share, while behemoths Google and Facebook account for more than half," Synesael wrote in a note to clients.
For Yahoo and its CEO Marissa Mayer, the Verizon deal represents a disappointing denouement to a multi-year attempt to turn around Yahoo's internet business, which has been ailing for nearly a decade. Mayer, a respected Silicon Valley executive who was a key early player at Google, has been trying for the last four years to re-fashion Yahoo as an online content leader.
Mayer's turnaround effort was ultimately unsuccessful, and no deal was more emblematic of that failure than her 2013 purchase of micro-blogging service Tumblr for $1.1 billion, in an effort to "make Yahoo cool again." Earlier this year, Yahoo took a whopping $482 million charge related to the Tumblr purchase, a humbling write-down for Mayer's flagship acquisition.
Colin Gillis, a tech analyst at BGC Partners, said that the sale of Yahoo's core business "removes the concern of the destruction of capital that is occurring by the current management, as reflected by the write down of the recent Tumblr acquisition."
"We see the purchase price paid for Tumblr—and subsequent write downs—as a perfect example of the misdirection undertaken by management, and a reason why the core business should be sold off and this turnaround effort halted," Gillis wrote in a note to clients.
Realistically, Yahoo's internet business was going to have to be sold, and for weeks it's been clear that Verizon was the most logical buyer.
McAdam, Verizon's CEO, is making bold statements about how the deal will make the telecom giant a "top global mobile media company." But the truth is, in the short term at least, Yahoo's atrophied internet business is unlikely to move the needle much for Verizon against the likes of Google and Facebook in the online advertising business.
"The Verizon investment community isn't taking this as a particularly big deal," Moffett told CNBC on Monday morning. "And appropriately so. The numbers simply aren't that large for a company like Verizon."