Verizon / AOL + Yahoo! Merger

You all are probably aware of the big, but not actually that big, news that Verizon/AOL is buying Yahoo!'s operating assets. Y! is comprised of three main assets, a big stake in Alibaba, a big stake in Yahoo! Japan (primarily owned by Softbank), and then the operating business that you all think of as Yahoo!, which is actually the least valuable of the lot.

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The transaction itself involves the entity Yahoo! selling the operating assets (yahoo.com, tumblr, brightroll, flurry, etc) to VZ. The remaining entity will become a holding company for the other assets. This whole thing was a tax gambit for Y! shareholders. Y! wanted to divest the other assets (Alibaba, Y! Japan) in a tax-free spinoff for its shareholders, but the IRS said no - it wouldn't be tax free. The tax burden would be 35%-ish of the value of those assets - 0.35 * $30B or so. Instead, Y! sold itself and has a tax of only $5B * .35, and the shareholders effectively have a tax-free-ish spinoff of the remaining assets, since now they're all that remains. This paragraph itself speaks mainly to the idea that running a public company is often quite divorced from optimizing the operations of the operating company itself, and also is quite boring.

There's a lot written about why AOL would buy Y!'s assets, and a lot of it is more thoroughly considered than what I will bring to the table. Quick summary, Y! struggled in a new world of mobile and social, and struggled to bring its assets and strategy into a cohesive package that grew in the new ecosystem. From a media perspective, Y! has a number of interesting, but declining, assets, including Y! Finance, News, Mail, their Homepage, and Tumblr. From an ad tech perspective, Y! has bought and developed a lot of tech, ranging from failures, like Right Media (disbanded) and Blue Lithium (https://en.wikipedia.org/wiki/Gurbaksh_Chahal), to varying degrees of successes, like BrightRoll (video ad exchange / platform), Gemini (native ad platform), Flurry (mobile ads & analytics), and Interclick (behavioral ad tech).

Verizon is a massive cell company. They own AOL, which has its own network of declining media properties (AOL.com, AOL Mail, MapQuest, Moviefone) and ad tech plays (Millenial Media, Convertro, Vidible, Gravity, Adap.tv, Quigo, AdTech, Tacoda, etc). Facebook and Google each have an incredible amount of data, reach, and targetable inventory. As a result, they've been able to capture a significant percent of digital ad spend. The bet is, simply, that Y! + AOL (possibly + VZ data and distribution) can create a bona fide third player at the same scale as Facebook and Y!. 

Whether that outcome happens depends. Both Y! and AOL have done mediocre jobs integrating their breadth of ad tech into a single platform as independent entities. There will assuredly be challenges integrating technologies, systems and egos across a much larger ecosystem. Verizon itself has incredible data - they can see all their subscriber's data on both cell and cable systems. Currently the FCC imposes limits on the degree to which this can be used, but it's not impossible to see that changing. It's also not impossible to see VZ creating cable and cell content channels exclusive to VZ subscribers based on AOL on Y! media and other value-add.

Neither AOL nor Y! are platforms designed for the next generation of content consumption. So the biggest question is whether they can move from the large websites that they represent today to meaningful players in the media world of tomorrow. They certainly represent large audiences, so can the combined weight of VZ + Y! + AOL create a platform and advertising ecosystem that rivals the attractiveness of Google and FB over the years to come? It remains to be seen. But for Verizon, the upside is potentially huge and the cost to its business was relatively small, so it's an interesting bet to make. For TripleLift, it means that potential competition in Y! and AOL will likely be distracted in lengthy merger and integration challenges while we continue on our mission.

Industry Update

In the last several months, we've seen a number of important structural changes at prominent ad tech companies. This includes significant layoffs at Turn, Pubmatic and more, acquisitions, major agency changes, etc. Here are my thoughts on some of the more significant events.

1) Yahoo spinoff - Yahoo's stock is valued around $35B, with it's stake in Alibaba currently worth around $31B. They have a significant gain in their Alibaba stock, so if they were to sell it outright, they would incur the tax of their gain (many billions). They tried to do a tax-free spinoff of the Alibaba assets and some relatively similar, minor assets, but the IRS chose not to give them pre-clearance. This meant there was a significant risk to Yahoo of having to incur the massive tax penalty for the gain if it did the spinoff. The value of Yahoo as an operating entity (portal, tumblr, mail, ads, etc) is less valuable than not recognizing the gain on the Yahoo stock. So that's why they're exploring a sale of the operating assets. Of course, Yahoo has failed to turn the company's fortune's around - but this is all about tax. If they had turned the company around, the conversation might be different. TBD whether someone will actually buy this.

2) Pubmatic layoffs - Pubmatic claims that this was to focus on their premier customers. They said a relatively small percent of their customers drove 90% of their business, so they didn't need all the engineering and support staff for the peripheral customer base. But they also failed to gain traction in key markets, which they shut down entirely, and there have also been a fair number of publisher defections. It appears that, in many instances, Rubicon, Google, etc. are winning head-to-head, but it's hard to know for sure from the outside.

3) Turn layoffs - Success in the DSP business seems to be determined by the strategic bets made by the customers. The Trade Desk bet on agency trade desks, and agencies themselves, retaining the programmatic media buying business. At least at the moment, this was the right bet. Turn, on the other hand, made a play for client direct - which generally annoyed agencies and turned out to be wrong. They also tried to charge on a subscription basis, rather than percent media. Customers didn't want to pay like that. So they went elsewhere. DBM, The Trade Desk, MediaMath, AppNexus and others appear to have been the beneficiaries.

4) Collective layoffs - Collective made a bet going direct to agencies based on a data-focused programmatic buying platform. This competes with the agency trade desks. Agency holding companies generally have internal mandates of some sort to use the internal trade desk instead of an outside company like Collective, so they got squeezed out of this business and left with the more niche secondary markets.

5) Agency reviews - there have been a ton of agency reviews by brands this year, covering many billions of dollars of media spend. It's hard to know exactly why, but there's some guess that brands are using reviews to try to get greater transparency on the agencies fees and pricing, as well as to drive them down. Carat has been a big beneficiary, perhaps because they have some of the lowest fees in the business. There's also a rumor that the reviews are motivated, at least in part, but brands wanting to understand the double fee structure of the agency trading desks.

6) Business Insider / Axel Springer - I've talked to a lot of people in the industry who are struggling here. The consensus is that BI is a fantastic "new media" player, and that Axel Springer is less savvy in new media. They paid a hefty premium, perhaps because BI can help make Axel Springer's portfolio more relevant in the digital world, where it's largely been less successful.