Verizon – Dumb pipe

More excited about its pipe than the contents

• Verizon reported good Q3 18 results headlining with 510,000 smartphone post-paid net adds, 5G and 6% YoY revenue growth and playing down the awful performance of its digital assets (Oath).
• Oath is the amalgamation of two ageing giants of the early days of the Internet (AOL and Yahoo) both of which look to me to be in terminal decline.
• Verizon stated that Oath’s revenues fell by 6.9% YoY in Q3 18 and that it no longer expects it to meet the revenue target set at the acquisition of $10bn by 2020.
• This is in stark contrast to Google where advertising revenues grew by 26% YoY in Q2 18, Facebook 42% YoY in Q2 18, Amazon 95% YoY Q2 18, Snap 30% YoY Q2 18 and so on.
• Verizon attempted to window dress this dreadful performance by saying that the technical skills from this division were being put to good use elsewhere in Verizon but I think that the good technical skills have long since left.
• It is not that Yahoo does not have access to users as recent research showed that 26% of all free Android apps have tracker hosts in them that share data with Oath (see here).
• This means that fewer and fewer users are engaging with these services because the quality of the Digital Life services that they offer is poor and still losing ground to competitors.
• The problem I have had with Verizon’s digital strategy is that it was late to the game meaning that it ended up acquiring all of the assets that no one else wanted.
• Furthermore, Yahoo and AOL both badly failed to generate any traction on mobile but somehow Verizon seems to think that putting all of these together will create a thriving ecosystem.
• This is, of course, possible, but if Yahoo was unable to hold onto the talent capable of executing this dream, I think that Verizon has very little chance.
• The evidence of this is now surfacing as Oath is very badly underperforming the other companies that compete in its space.
• Consequently, instead of a thriving ecosystem, I see a bunch of disparate assets from which users are going to continue exiting at the first opportunity.
• This means that Verizon’s attempt to own the content as well as the pipe is almost certainly going to fail badly, resulting in a significant write-down of the $4.48bn that it paid to acquire the Yahoo assets from the parent company.
• I suspect that deep down Verizon knows this as well and is instead concentrating on making its pipe bigger, faster and better than anyone else’s.
• While it can differentiate this way, there will be good money to be made but at the end of the day, it is selling a commodity product meaning that it will feel the pinch as others catch-up.
• This is how I think investors should look at Verizon and I continue to value the Oath business at zero or less.
• To realise value from Oath, Verizon should stop investing and run these businesses for as much profit as possible until they finally expire.