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Why Verizon Might Be Conceding Defeat on Its AOL and Yahoo! Purchases

By Nicholas Rossolillo - Nov 4, 2018 at 1:35PM

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Verizon decides its game is all about mobile connections after all.

During its third-quarter 2018 earnings call, Verizon Communications (VZ -2.17%) informed shareholders that its Oath business -- made up of media assets including Yahoo!, AOL, TechCrunch, and HuffPost -- will not reach its goal of $10 billion in annual revenue by 2021. That's OK, as the telecom has instead been preoccupied with the future of mobility. Oath should be given the dairy cow treatment: It should be milked for what it's worth, but spending money on it directly to make it bigger isn't that important.

An ill-advised spending spree?

Back in 2015, Verizon announced it was buying AOL and its online content and advertising business for $4.4 billion. Two years later, it acquired Yahoo! for $4.5 billion. Though the companies were early internet pioneers, both are shells of their former selves, having been upended by the likes of Alphabet Inc's (GOOGL 5.11%)(GOOG 5.20%) Google and Facebook. Nevertheless, AOL and Yahoo! still muster hundreds of millions of unique users every year. The goal of combining the two media companies under the new parent organization Oath was to help eliminate expenses and boost profitability.

Verizon doesn't break down its profit from Oath, but it expected the new company would be able to better compete with the Google-Facebook duopoly. That hasn't panned out, as revenue continued to contract over the last year.

Quarter

Oath Revenue

Q3 2017

$2.0 billion

Q4 2017

$2.2 billion

Q1 2018

$1.9 billion

Q2 2018

$1.9 billion

Q3 2018

$1.8 billion

Data source: Verizon quarterly earnings.

Management now expects revenue to be relatively flat at Oath going forward, which would put annualized sales at $7.8 billion based on Oath's trailing 12-month results. Verizon also announced on the third-quarter earnings call that it's cutting its 2018 capex guidance again -- to a new range of $16.6 to $17.0 billion -- which would seem to indicate that cost savings is now the name of the game for Verizon. But there's more reason to believe Oath could be allowed to continue its slow downward spiral.

Verizon's new running mate?

Google has been licensing its name out to device manufacturers for years, but last year it acquired the Pixel phone design team from HTC and brought it in-house. While Google's hardware efforts -- including the new Pixel phones -- have been well received, they are still a small fraction of Alphabet's empire. It would seem instead that the company is using the hardware to show off and promote its suite of software, the real bread and butter at Alphabet.

It may come as a surprise, then, that Verizon is the exclusive telecom selling partner of the Google Pixel phone. Additionally, Verizon and Google have been promoting the Pixel lineup with aggressive sales deals. That doesn't seem to make sense, as Google hardware sales foster use of Google software, media, and search services, which would be more bad news for Oath. $10 billion in Oath revenue by 2021 seems off the table indeed.

The business agreement makes perfect sense for Google, but what exactly is Verizon's angle here?

Four young people using their smartphones standing against a red wall.

Image source: Getty Images.

Why Oath is of secondary, or even tertiary, importance

It would seem Verizon is backing away from its former media empire push. Instead, America's leading wireless company is doubling down on its network and going for subscribers -- specifically of the next-generation variety.

Getting aggressive with phone deals to add 4G wireless subscribers has been a winning strategy, helping Verizon's revenue creep higher in the last couple of years. Over the next decade, the 5G network will be Verizon's next big push. New CEO Hans Vestberg said that is the focus of the telecom's investing activity going forward.

Initially, 5G will be offered as a super-fast home internet broadband service. Within the next couple of years, a wireless version will launch for smartphones. Over time, though, 5G will be the backbone for myriads of other internet-connected devices: industrial equipment, cars, and smart cities, as well as the consumer devices out there already.

The revenue generated from connections to Verizon's wireless network is where the real money is. Investing in new network technology and growing the number and type of devices that use it is the focus for Verizon. If that means letting Oath dwindle away while reaping as much profit from it as possible along the way, then so be it.

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