Reports that Verizon Communications (VZ) is closing in on a deal to buy Yahoo (YHOO) for about $5 billion raises the question of why the wireless giant wants a company that, while undoubtedly an online pioneer, is today a fading force in the Internet world.
In fact, there's good reason why Verizon, which plunged into the digital content business last year through its $4.4 billion acquisition of AOL, would want Yahoo.
First, the U.S. wireless market is stagnant, forcing carriers to spend big money on advertising in hopes of luring customers away from their rivals. Smartphone sales, which fueled the industry's growth earlier in the decade, have cooled to the point where consumers who want the device probably already have them, said independent telecommunications analyst Jeff Kagan. According to the trade publication Fierce Wireless, in the first half of 2015 smartphone sales fell for the first time on a year-over-year basis.
Moreover, fewer customers are buying new smartphones or upgrading their existing devices as they await the launch of the iPhone 7, expected sometime this year.
Of course, wireless customers are using data and apps more than ever, which is supporting the industry's profit margins. Verizon and other wireless companies are betting that providing original content will solve their growth problems.
Some experts are skeptical. "These are not big, growing companies," said Kagan, referring to Yahoo and AOL, adding that they won't "transform" Verizon. "I am not convinced that this is going to work."
A second reason Verizon wants Yahoo is to keep pace with its rivals in a rapidly changing market. For instance, AT&T acquired satellite TV provider DirecTV for $49 billion in 2015, giving it a leg up in the world of bundled services. Sprint (S), which has struggled for years with profitability, can count on the financial support of its largest shareholder Japan's Softbank, backed by billionaire Masayoshi Son.
Earlier this year, meanwhile, there were rumors that Sprint would acquire T-Mobile (TMUS), which has added more than 1 million subscribers for seven quarters in a row. T-Mobile has added far more customers than its rivals in recent quarters thanks to its inventive marketing.
Third, bigger is thought to be better, especially when it comes to a high-cost business like producing content. Yahoo attracts 1 billion visitors to sites such as Yahoo Sports and Yahoo Finance every month, making them one of the web's most popular destinations, compared with the 130 million or so who access AOL's sites.
Unfortunately for Yahoo, the Sunnyvale, Calif. company isn't profiting as much from the popularity of its content as Wall Street would like. According to eMarketer, Yahoo's share of the worldwide digital market is expected to shrink to 1.5 percent this year, from 2.1 percent in 2015. Verizon's share, which includes both AOL and Millennial Media, a mobile advertising company acquired last year, fell to 0.7 percent, from 0.8 percent. Alphabet's Google (GOOG) and Facebook (FB) dominated eMarketer's rankings, with with roughly 31 percent and 12 percent, respectively.
Indeed, even under the most optimistic of scenarios, put together two growth-challenged companies like Verizon and Yahoo is no guarantee of success.