Verizon made the right decision not to be big on media

Sometimes the scope of the strikeout matters.

When Verizon acquired Yahoo for $4.8 billion in 2016 after spending $4.4 billion for AOL a year earlier, investors and analysts were skeptical. It turns out they were right to be. Verizon announced Tuesday it was writing off $4.6 billion from those two deals, erasing nearly half of the companies’ combined value.

At the time, Verizon weathered criticism about not only buying past-the-prime assets but also being too cautious with its acquisition strategy. Its primary competitor, AT&T, had just agreed to spend $133.5 billion ($175 billion with debt) on DirecTV and Time Warner, firmly planting its media flag. Yahoo and AOL seemed like a meek response.

In hindsight, Verizon’s inaction may have been its best action.

Some felt it would be impossible for a combined AOL and Yahoo, which were renamed Oath, to have the scale to take on Google and Facebook in the digital ad market. That criticism has proven to be correct. Oath’s U.S. digital advertising market share fell from 4.1 percent in 2017 to 3.3 percent in 2018 and is on pace to fall below 3 percent in 2019 and 2020, according to research firm eMarketer.

“Verizon’s Media business, branded Oath, has experienced increased competitive and market pressures throughout 2018 that have resulted in lower than expected revenues and earnings,” Verizon said in a filing Tuesday. “These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business.”

But Verizon has won points from investors for failing small instead of failing big.

AT&T has likely destroyed about half the value from its $49 billion DirecTV deal, according to Craig Moffett, an analyst at MoffettNathanson, who has covered the telecom industry for more than two decades.

And now AT&T must prove it didn’t make another mistake buying Time Warner “at the top of the market,” Moffett said. AT&T paid $107.50 per share for Time Warner in Oct. 2016, about a 40 percent premium to where Time Warner traded before Bloomberg News broke the story that the companies were in talks.

So far, investors have applauded Verizon’s renewed focus on expanding its 5G network rather than paying huge dollars to enter the pay-TV business. Verizon shares have gained more than 12 percent in the last 52 weeks. AT&T, on the other hand, is down 19 percent.

Even Tuesday, when Verizon announced its writedown, shares were up about 1 percent to about $59. Criticism about being too gun-shy to enter the media business has turned to praise for only dipping a toe in the water.

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