TELECOM Digest OnLine - Sorted: Yahoo to Lose Contract With AT&T

Yahoo to Lose Contract With AT&T

Michael Liedtke, AP Business (
Sat, 10 Mar 2007 16:18:16 -0600

Yahoo stock dives on news of AT&T loss
By MICHAEL LIEDTKE, AP Business Writer

Yahoo Inc.'s recently resurgent stock retreated by more than 5 percent
Friday amid fears that a setback in a lucrative partnership with AT&T
Inc. will undercut the anticipated gains from an overhaul of the Web
portal's advertising platform.

The sell-off was triggered by an unconfirmed report in The Wall Street
Journal that AT&T wants to stop giving Yahoo a slice of the subscriber
fees from a 6-year-old co-branding agreement to sell Internet access
in most of the country.

If AT&T gets its way, Yahoo would have to be satisfied with whatever
money it could make by selling its own online products, such as
digital music or matchmaking services, to subscribers of the joint

In a statement issued late Friday, San Antonio-based AT&T and
Sunnyvale-based Yahoo said they are constantly examining ways to adapt
to changing market conditions. Neither company addressed the substance
of the Journal's report, which the statement described as

"As we continue our conversations, we have a common goal to increase
the economic benefits for both parties," Yahoo Chairman Terry Semel

By the time Semel weighed in, investors had already drawn their own
negative conclusions. Yahoo shares dropped $1.59, or 5.2 percent, to
close at $29.12 on the Nasdaq Stock Market.

Before Friday's downturn, Yahoo's stock had climbed by 20 percent this
year, rebounding from a horrible 2006 performance. That reflected Wall
Street's widespread belief that Yahoo will prosper from a month-old
upgrade to its formula for linking ads to search requests.

But a reshuffling of the AT&T deal would deliver a substantial blow.

Under the current terms of the contract, AT&T is believed to pay Yahoo
$200 to $250 million annually, accounting for more than 25 percent of
the $798 million in total fees that the Internet powerhouse collected
last year. Most of Yahoo's revenue -- which totaled $6.4 billion last
year -- comes from advertising.

Compounding the pain, Yahoo's profit margins on the AT&T partnership
are much higher than on many of its other services because the
telecommunications carrier handles most of the heavy lifting.

Standard & Poor's analyst Scott Kessler estimated the AT&T deal
generated somewhere between $30 million to $70 million, or 2 to 5
cents per share, of Yahoo's 2006 profit of $751 million.

Analysts expect Yahoo to earn nearly $780 million, or 54 cents per
share, this year.

The damage to Yahoo could be worse if its other major Internet access
partners -- Verizon Communications Inc., BT Group PLC and Rogers
Communications Inc. -- follow AT&T's lead when they renegotiate their

Yahoo hasn't publicly disclosed the length of the contracts with its
Internet access partners, but the AT&T alliance reportedly expires in
April 2008.

Friday's news woke up many investors who thought Yahoo had turned the
corner after slowing revenue growth and competitive challenges posed
by increasingly popular Internet hangouts like contributed
to last year's 35 percent decline in Yahoo's stock price.

An improved advertising system known as "Panama" -- unveiled Feb. 5
after a three-month delay -- has become the foundation for Yahoo's
turnaround hopes. The upgrade is supposed to begin boosting Yahoo's
profit in the second half of this year -- a prospect that now looks
shakier, Kessler said.

"A lot of people have gotten scared again and are starting to realize
that they have been pinning their hopes on the promise of something
that is still uncertain," he said.

Copyright 2007 The Associated Press.

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[TELECOM Digest Editor's Note: I saw this when it started, several
years ago; first there was 'Yahoo whatever' then it switched to
'(telco) Yahoo' and you had to use telco's DSL to get Yahoo to work
correctly. I am reminded of the middle age man and woman who had
a very good thing going with their little home 'cottage industry'
factory making trinkets of some kind or another. Then _Walmart_ got
interested. Walmart agreed to sell the trinkets but only on the
condition this man and woman were the sole suppliers.

The couple were thrilled to death to get that Walmart supplier
contract! Where they had been selling a few dozen trinkets each month,
and making a modest, but decent living, now they would be making
*much* more money. Business got to be so good for them, they wound up
having to drop many of their old established customers; no time nor
resources to handle them. But that was okay, the Walmart business
would offset the loss of a 'few' of their older customers. All went
well for a few years, then one day Walmart decided to change the
payment terms. Instead of payment in 30 days, it would now be payment
in 60 days. Then, it eventually got to the point that Walmart decided
this couple would no longer be the sole supplier; i.e. they would have
to compete with other makers of trinkets. Eventually, the couple wound
up going out of business; Walmart would not help them any.

Lesson to be learned is _never_ allow your business to become sole
supplier of _anything_ to Walmart; (nor, telco for that matter; Yahoo
was the exclusive supplier of network software to the telcos for quite a
long time). I remember quite well, late 1980's, early 1990's how Yahoo
was literally a small mom and pop type outfit. Basically, Southwestern
Bell (the old name of the present AT&T) is going to damn near put them
out of business from demands made upon them at one time or another. PAT]

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