By agreeing to buy Yahoo Inc.'s Internet business, Verizon Communications Inc. is tooling up for a future in which owning a vast broadband data network is not enough. Verizon is making a big bet that in order to prosper, it must control much of the content that flows across its network — news, entertainment offerings, and above all advertising.
That's the logic behind the $4.83 billion deal. But it's far from obvious that Verizon can make it work. Some of the smartest people in Silicon Valley, including current Yahoo chief executive Marissa Mayer, have failed to light a fire under the company, which generated just under $5 billion in revenue last year, about what it posted in 2011.
If Verizon hopes to use data from its millions of cable and wireless phone customers to create more personalized and profitable online ads, it will have to get past the Federal Communications Commission, which recently proposed a tough new privacy plan.
The company could track its millions of Verizon Wireless users to see which Yahoo sites they visit. With this data, Verizon could create a detailed profile of each customer's lifestyle and buying habits. Advertisers could use those profiles to deliver more effective, personalized commercials, and Verizon could charge higher rates for them.
"The whole value of this acquisition is to be able to have a 360-degree profile of all users," said Shar VanBoskirk, an analyst with Forrester Research in Cambridge.
But the FCC earlier this month proposed regulations that would require Internet providers like Verizon to get explicit permission from customers before sharing their personal data for marketing purposes. VanBoskirk said Verizon's acquisition of Yahoo will pay only off if the company can find a way to reconcile its data-sharing plans with any new FCC rules.
"I think the first thing Verizon is going to do is figure out the privacy issues," she said.
Verizon has little experience in creating the kind of strong online content that Yahoo needs. Though the company owns the popular news site the Huffington Post, thanks to its $4 billion acquisition of AOL last year, it's mainly a builder of vast data networks. The company provides cellular phone and data service to 112 million Americans, and its Fios optical fiber network claims seven million Internet customers and nearly seven million TV subscribers.
But tech analyst Jack Gold of J. Gold Associates in Northborough said Verizon must master content as well as networking if it's to keep growing. That's because the US Internet market is approaching saturation. As a result, Gold said, "the only way you can increase revenue is to increase services," particularly advertising.
Verizon's biggest competitors, such as AT&T Inc. and Comcast Corp., are already major content producers, mainly in the form of TV and movie production. Comcast owns NBCUniversal, a major movie and TV studio, while AT&T produces original TV programs for its U-Verse cable network and DirecTV satellite service.
Yahoo experimented with its own slate of original TV shows, but shut down the service earlier this year due to low viewership. However, Yahoo is a major producer of short-form video, including news, sports, and entertainment features. Gold said it's uncertain whether Yahoo will take another run at producing TV series, but Verizon could easily repackage Yahoo's videos as ad-supported content for its wireless and Fios customers.
Apart from video, Yahoo has plenty of appealing content, including popular e-mail, news, and entertainment features. "They've assembled a very strong group of properties, but without any sort of unifying theme," VanBoskirk said.
And despite Yahoo's travails, it still commands a vast audience. The company estimates the various Yahoo channels draw one billion unique users per month worldwide — about 200 million in the United States alone. According to the market research firm comScore Inc., Yahoo is America's third-most-popular Internet destination, after Google and Facebook.