From Internet Outsider
The WSJ reports that Yahoo and AT&T are renegotiating their broadband access partnership on terms far more favorable to AT&T. According to the article, this is a result of three factors:
- Yahoo’s reduced stature and buzz (thanks to Google)
- A reversal in the market dynamic in which search engines are now paying for carriage (thanks to Google).
- AT&T’s newfound prowess in broadband access (7 million subs).
No. 2, a reversal in who’s-paying-who, is a profound change, one ushered in by Google’s deal with Dell in which it agreed to pay $1 billion to be preloaded on Dell PCs. Paid search is so profitable that Google can afford such deals, but the changing dynamic illustrates that search, like other businesses, is subject to the laws of capitalism (attractive returns draw new competition which reduces returns).
Google and Yahoo won’t soon be forced to hand over most of their profits for carriage–most of their traffic, presumably, goes direct, and users usually demonstrate significant loyalty/habits about who they search with. Like the massive increases in CAPEX at both companies, however, increased distribution and CAPEX costs will probably continue to weigh on both companies’ bottom lines.
In Yahoo’s case, according to the WSJ, a new AT&T deal could significantly reduce the $200-$250 million in revenue the company earns from the deal (approx 5% of overall revenue). This revenue is probably at least as profitable as the rest of Yahoo’s business, so it might feel an even greater impact on the bottom line.
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