Terry Semel's departure as CEO of Yahoo has again raised speculation that Yahoo is acquisition bait. Of course this rumor's been flying for ages. So here's my point of view: Comcast should acquire Yahoo. And they should do it now.
Some of you will recall that in my September, 2005 e-newsletter, "Why Comcast Should Acquire AOL", I laid out the case for Comcast to push aggressively into the online media business. At the time I thought an acquisition of AOL would be a bold stroke. While I had no inside knowledge of Comcast's plans, shortly afterwards it came to light that Comcast had indeed sniffed around AOL. Now, again, I have no knowledge of Comcast's possible interest in Yahoo, but it wouldn't surprise me if we saw something surface soon. It would be a very smart deal for Comcast. Following are my 5 key reasons. Judge for yourself.
1. The offensive case: Comcast needs more exposure to the online media business
Comcast is a company that urgently needs more long-term exposure to the online media business. In the last few years online usage and online advertising have exploded. A more recent category of burgeoning growth is of course, broadband-delivered video. I believe the trends around both online and broadband usage are only going to gain further momentum in the years ahead.
To see why, it is critical to understand the shift in media consumption patterns occurring among young people today. As one data point, JupiterResearch recently reported that online users under 35 spend more time online than watching TV. Meanwhile Magid just released figures showing that 80% of 18-24 year old males watch broadband video at least once a week, with 35% watching on a daily basis.
Today's young people live online. There is scarcely an aspect of their lives (except sleeping, eating, and other obvious activities) that they do not look to the Internet and mobile technologies to fulfill for them. All of this activity has also fueled their general product/service expectations. Accustomed to significant personalization, choice and price competition, this group is going to be the toughest customer base to please and the least tolerant of products/services that don't meet their specific needs. How does all this relate to cable? I believe that when many young people set up their own apartments, they will increasingly conclude that cable operators' basic programming tiers do not meet their personalized needs and will be looking online for programming alternatives.
Any company in the media or related industries that is not positioning itself squarely in the middle of the online media space, and broadband video in particular, is making a huge mistake. Some of you have heard me say this before: when companies get on the wrong side of fundamental changes in customer behavior, they are sure to meet with peril in the future. For just one example, consider the catastrophic state the U.S. auto industry now finds itself in because it failed to understand shifting consumer tastes 30 years ago (tastes which Japanese makers grasped and have mercilessly capitalized on).
To be fair, it's not as if Comcast has ignored online media and broadband video. It has acquired thePlatfom and Fandango, has started Ziddio and will soon be launching Fancast. And its Comcast.net portal gets strong traffic. However, I believe that even when all these activities are combined, they do not give Comcast enough exposure to online media.
A Yahoo deal is all about Comcast being positioned properly and with the right scale to exploit the inexorable shift to online and broadband usage. Alternatives that do not do so as quickly or forcefully are by definition sub-optimal.
2. The defensive case: Comcast must pre-empt another Yahoo acquirer
As important as the offensive case is for Comcast, the defensive one may be even stronger. Comcast simply cannot allow Yahoo to fall into either Microsoft's or (heaven forbid), Google's hands (though that prospect would face steep FTC objections).
To see why this is so important it is necessary to understand a fundamental change happening in the media business, which is that the economics of media are rapidly shifting away from consumer-paid models (i.e. subscriptions, a la carte purchases, etc.) toward ad-supported models.
There are at least two important and interrelated reasons for why this is happening. First, the efficiency and effectiveness of the advertising business are both improving dramatically. Online targeting technologies (search/keyword, contextual, behavioral and other mechanisms) enable marketers to get unprecedented returns on their spending. As marketers spend more online and compete with each other for limited high-quality ad inventory, publishers in turn are able to monetize their content better than ever. This dynamic is the backstory behind online advertising's resurgence. I believe it is not only going to continue, but quickly spread into the video business, which has, to date, been well-insulated from the Internet revolution.
The second and interrelated reason for the shift in media economics is that various technologies (digitization, storage, bandwidth) are all making it lower-cost (and in some cases, virtually no-cost) for companies to provide at least an introductory tier of their services for free. With costs so low, it is possible for providers to employ much more flexible business models and still generate adequate financial returns.
As a result, a genuine pattern is developing whereby traditionally premium services (i.e. those paid for by consumers) are becoming free, either with ads, or in some cases, without. The examples abound. Start with my favorite — online access to broadcast TV programs. Just over a year ago the only way to watch a broadcast program online was to buy it, likely at iTunes. Now over 40 hit broadcast programs are freely available — on an ad-supported basis — with more coming all the time. Broadcasters have quickly recognized that advertising is a far better business than paid downloads.
There are plenty of other examples. You can now make a 411 call without charge, courtesy of Jingle Networks and others, supported by ads. Or get an email account with unlimited storage for free, with ads. Or send receive a free fax. And the list goes on.
Given all of this, I believe that an important future competitive advantage in the media industry (in fact, quite possibly, the most important competitive advantage) will be expertise in content monetization through increasingly sophisticated advertising mechanisms. Companies that have this capability will be the media industry's ultimate winners. Of course, in search, that's the position that Google has expertly dominated to date, driving its lofty stock price. And by the way, Google and Microsoft have each just doubled-down on this advertising theme, recently spending a combined $9B to acquire DoubleClick and aQuantive respectively (which had combined revenues of less than $600 million in 2006).
So stop and consider a company like Comcast, which in 2006, generated about 60% ($15.1B) of its overall revenues from cable TV subscriptions. High speed Internet kicked in another 20% ($5B), voice 3.6% ($913M), programming networks (all TV-based) 4.2% ($1.05B) and local advertising 6.1% ($1.5B). By my calculations, Comcast's ratio of consumer subscription revenue (cable + Internet access + voice = $21B) to advertising revenue (programming + local advertising = $2.55B) is around 8:1 (note I didn't deduct affiliate fees its programming networks take in). That means that as cable TV networks inevitably offer more of their programming for free to consumers (which is already happening in the recent Joost deals) and more content choices are available through broadband, Comcast's cable TV subscription business becomes increasingly vulnerable and along with it, Comcast's overall financial health.
So if you buy my logic that content monetization through ads is critical, that Comcast doesn't have enough expertise in this area and that its current subscription TV business is vulnerable long-term, the question becomes how does Comcast re-position itself to compete properly down the road?
Could Comcast build out its own content monetization and advertising capability? Sure, anything's possible. But consider how long Yahoo itself (with its deep roots in Internet search) has been laboring over Panama (its next generation ad system) just to gain parity to Google and you get a sense of the enormity of the challenge. An alternative would be for Comcast to partner for this capability. That's possible too, but sub-optimal. If you believe that content monetization is going to be as critical in the future as I do, how could a company with Comcast's reach not have this as a core internal competency?
So here again, a Yahoo deal would not only give Comcast these crucial capabilities, but also preclude another company from gaining access to Yahoo's content monetization technologies and skills. This would remove the threat of that company competing more strongly against Comcast in the future.
3. Yahoo enables Comcast to become THE next generation video aggregation leader
Acquiring Yahoo would allow Comcast to take a leadership role as THE next-generation, cross-platform video aggregator. This is the most exciting reason for the acquisition. As content distribution continues to shift to broadband delivery, there are going to be innumerable new competitors to Comcast, each offering a different consumer value proposition. One thing is for certain — each and every one of them is going to be freely riding Comcast's (and other cable operators') broadband pipes into users' homes.
I have written about these "over-the-top" or "cable bypass" services in the past, and they represent a real long-term threat to Comcast and others. Sure, very few people are dropping their cable subscriptions today to cobble together broadband content in bits and pieces. However, I can tell you anecdotally, judging by the number of friends OUTSIDE the industry who have asked my opinion, there is significant consumer interest in dropping cable service and piecing together a more personalized lineup.
To defend itself, Comcast is in a unique position — able to both deliver standard and high definition digital TV signals to a set-top boxes and also IP-based, broadband video to over 10 million high-speed Internet subscribers today, and growing. There are very interesting bundling opportunities between these services, which will offer far greater value to Comcast subscribers, but at little additional cost to the company. In addition, there are unique ways for the company to use broadband to offer enhanced distribution to programmers eager to expand their share of Comcast's subscribers' viewership.
The key to defining this next-generation aggregation role is for Comcast to have a robust Internet suite of services and capabilities to build from and tie into. Succeeding in the video aggregation business in the future is going to be about far more than piping channels into consumers' homes. Rather, it's going to be about wrapping all kinds of related services, interactive/social networking capabilities and advanced advertising around the core video. So one capability that I described above that is needed is content monetization through ads. But there are many others, among which Yahoo has significant market shares. These include email, social networking, photos, travel, maps, jobs, personals and others. Marrying some or all of these to Comcast's current services, particularly at the local level, will create new and highly differentiated video offerings that "over-the-top" providers will be hard-pressed to match.
In short, Yahoo gives Comcast a whole new range of services to leverage in order to become THE leading next-generation video aggregator.
4. Yahoo gives Comcast a much-needed international presence
In the old days, a cable operator thought it was becoming international when it decided to add Telemundo or Univision to its channel lineup. (You think I'm joking!)
Today, being an international company means tapping into fast-developing economies all over the world. It is a simple fact that in developing economies, tens of millions of people are joining the middle class, bestowed with newfound spending power. This of course is why there are daily announcements from American companies trumpeting their new international ventures.
Yahoo and all the other major Internet companies have recognized this, operating essentially borderless businesses and offering their services in multiple languages. Yahoo has hundreds of millions of international users and in 2006 generated over $2B in international revenues. It provides its service in over 20 languages and has offices in over 20 markets around the world.
Comcast, on the other hand, offers its services only in America. It's tempting to say that's OK, since the markets in which Comcast operates are fundamentally local and have been mainly insulated from international competition. Yet, when you look at households across America, there are at least three concerns. First is that Comcast passes a defined number of them, so its addressable market is limited. Second is that there is real spending fatigue in many homes. Both of these diminish opportunities for top line revenue growth for services cable operators offer. Finally, with the spread of digital distribution technologies, Comcast faces new video competitors from all over the world vying to deliver video to homes within Comcast's footprint.
So sure, adoption of voice services is currently driving double-digit cash flow growth for Comcast and others, but how long will that last? These new revenues represent a market share shift from telcos, not new net market growth. They are nothing to sneeze at, but telcos are preparing their own market share assault on cable's video customers. And then of course there are wireless broadband services like WiMax, which will inevitably cut into Comcast's (and others') current market shares.
International exposure would provide Comcast with a whole new growth story. And Yahoo would provide this platform immediately. And by the way, there's another angle on international expansion. For anyone paying attention to the raging immigration debates here, our own American communities are becoming more and more ethnically mixed themselves. So for example, wouldn't it be cool for Comcast to have access to advertisers in China who want to insert their ads on Comcast's cable systems here in the U.S.? As the world becomes a global village, Comcast needs to fully participate in it.
5. Comcast needs more technology DNA, Yahoo provides it
Last but not least, Comcast needs more online and technology DNA in its culture and Yahoo can provide it. Mind you, I know many outstanding people at Comcast who are totally immersed in the online and broadband realms. However, they are an island in a sea of thousands of customer service reps, field technicians and operating executives steeped in the cable business. In fact, virtually all of Comcast's senior management team comes from within the cable industry, if not from within the company itself. To fully capitalize on its online and broadband opportunities, Comcast needs more people with more perspectives. People who aren't rooted in the core business and the traditional way of doing things. People who have more experiences operating within the very companies Comcast will increasingly be competing against.
As well, Yahoo would also bring Comcast access to the Silicon Valley ecosystem and culture of innovation. While there are plenty of other pockets of innovation around the U.S. and the world, the Valley is still the epicenter of the action and Yahoo's right in the middle of it. Becoming immersed in this culture would allow Comcast to learn first hand about the faster development cycles that characterize Web 2.0 initiatives and pull those talents into the company. This may seem like soft stuff, but building corporate cultures attuned to larger market circumstances is critical for all companies to succeed. Though Yahoo is already a Comcast partner, this relationship, no matter how strong, will never be sufficient to change Comcast's DNA.
Wrapping Up
OK, that was a mouthful. Obviously I think there are many compelling reasons for Comcast to go forward. Less clear is whether Yahoo would be interested. New CEO Jerry Yang obviously loves this company — he's not only a co-founder, he's stayed around all these years. So he'd likely be a reluctant seller. Susan Decker gets rave reviews and would likely want her turn to run the show. That said, shareholders are restive and their recent action clearly help stir the waters for Terry Semel's departure. So at the right price, shareholders would probably be motivated sellers.
So let's say Yahoo is willing. Could Comcast win this deal, particularly when there would likely be a spirited bidding war? Clearly Comcast would need to bring a full wallet to compete with the likes of Microsoft and others. Today Comcast's market capitalization is about $87B, while Yahoo's is currently around $37B. So say it takes a 30% premium to win the company. That's a deal worth around $50B. In short, a very big bite for Comcast, and very dilutive, given Yahoo's '06 revenues were a little over $6B (compared with Comcast's $25B). However, I'm a believer that Yahoo stock isn't going to get any cheaper. Despite its recent woes, Yahoo is a tremendous franchise that would be virtually impossible to replicate. If Comcast is going to make a move, it should do so now.
A key to success would be Comcast messaging the deal properly to the Street. Comcast did a disastrous job at this with its Disney bid in 2004, which not only failed, but cratered the stock for a long time after. Having the Street's support, in the form of a sturdy Comcast stock price, would be very important to Comcast's success.
Let's see how things play out.
