Digital ads and subscription services, with more products on the way

Reviewed by Akhilesh Ganti

It’s only a slight overstatement to suggest that Yahoo was the SpaceX of the late 1990s. Back then, the concept of using a single search engine to search the internet easily and quickly seemed as futuristic as commercial interplanetary travel or asteroid mining do today. Throw in a free email service, instant messaging, and up-to-the-hour news feeds, and Yahoo appeared poised to become the technology company for a new century.

Then Google, now Alphabet (GOOG), happened. It offered virtually everything Yahoo did except cheaper and faster. That condemned Yahoo to the unfortunate fate of devolving from a precocious upstart to a sluggish legacy company in a mere 18 months. It now exists as a diminished yet lucrative amalgam of disparate offerings, with everything from fantasy football and celebrity gossip to web hosting and maps. This is all packaged for the company’s real clients—its advertisers.

So how does this once-darling of the internet, which is now owned by Verizon, continue to make money? This article outlines a brief history of Yahoo and its business model.

Key Takeaways

• In the 1990s, Yahoo was one of the biggest names is tech. Then Google happened.
• Yahoo’s revenues peaked in 2007, shrinking every year thereafter.
• Verizon acquired Yahoo for $4.5 billion in June 2017.
• Nine Yahoo sites make up over a third of Verizon Media’s branded sites.

A History of Yahoo

Yahoo was founded in 1994 by Jerry Yang and David Filo. The two were graduate students at Stanford University. It began as a collection of websites and was originally called Jerry and David’s Guide to the World Wide Web. As its popularity increased, Yang and Filo changed the name to Yahoo!, which was an acronym for Yet Another Hierarchical Officious Oracle.

The company was incorporated in 1995 and made a series of acquisitions. Unlike other companies that were born during the dotcom era, Yahoo survived. After its revenues began shrinking following its peak in 2000, Yahoo was acquired by Verizon (VZ) for $4.83 billion in 2017.

It now operates alongside brands like HuffPost and Tumblr under the umbrella once called Oath, which was recently retooled as Verizon Media. Confusingly, Oath and Verizon Media both currently exist, and therefore sites like Yahoo are effectively being run by two different companies. This has led to disorganized management.

The Business Model

Verizon’s 2017 acquisition totally shook up Yahoo’s business model and turned the company away from the Asian market. Yahoo’s business included an equity stake in Alibaba (BABA), the astonishingly successful Chinese monolith that serves as something of a hybrid eBay (EBAY), Amazon (AMZN), and Google to China. That stake, initiated by former Yahoo chief executive officer (CEO) Marissa Mayer, kept Yahoo alive through most of its digression. Verizon chose not to acquire the Alibaba stake. It also chose to exclude Yahoo Japan from the sale.

Most of Yahoo’s business model was redundant in a sated marketplace. Despite Verizon Media’s efforts, this may still be true. Almost every Yahoo service has a more prominent, more successful, and more easily identifiable competitor. Among them are:

• Yahoo Movies vs. Comcast’s Fandango
• Yahoo Weather vs. Weather.com
• Yahoo Sports vs. Walt Disney’s (DIS) ESPN.com

But if you have an active Yahoo email account that you never bothered to close after switching to Gmail, or if you happen to click on a Yahoo-branded news link, congratulations. You are one of the monthly active users (MAUs) whom the company claims to engage. Verizon’s strategy is to leverage this engagement for digital advertising. Verizon Media currently owns branded 23 sites, including nine Yahoo sites.

Digital Ads

Ads on Yahoo sites work like any other digital ads. Yahoo sells ad space to advertisers. Ad spaces are only valuable based on the number of clicks they receive. Advertisers can choose to buy space on Yahoo sites through Verizon Media’s supply-side platform, which is more profitable for Yahoo, or on third-party demand site platforms, which is more efficient for advertisers and less profitable for Yahoo.

Verizon’s financial statements don’t differentiate Yahoo’s financial performance. But we can infer that the engagement with Yahoo sites works for Verizon, even if it’s not nearly as well as the company hoped. According to its annual report, Verizon’s media business saw a revenue increase of $1.7 billion, or 16.6% in 2018 compared to 2017. Most of this revenue increase is attributable to the influx of advertising dollars Verizon Media now collects from Yahoo sites. This makes Yahoo just barely profitable, given that Verizon Media’s operating costs also rose by $1.3 billion, or 4.1%, due to its takeover of Yahoo.

Verizon’s annual report also admits that its Yahoo acquisition is proving less profitable than expected, despite an unprecedented 22% rise in industry-wide revenues during the first three quarters of 2018. This is because the takeover injected even more competition into the already extremely competitive digital advertising market. Google currently dominates the market, but it is losing ground to Facebook and Amazon. As a result, Verizon’s current market share in digital ads is currently only 2.9%, down from 3.4% in 2018.

As it stands, Yahoo, and Verizon Media broadly, are still money makers for Verizon, but just barely. Although the digital ad industry is booming in terms of volume, Verizon’s decreasing market share doesn’t bode well for the company’s future in the space.

2.9%

Verizon’s share of the digital advertising market.

Future Plans

Verizon Media is undergoing significant changes in an attempt to save itself. The company is planning on launching a whopping 20 new products in the next six months. Yahoo Finance and Yahoo Mail play big roles in this strategy. The hope is to boost Yahoo’s profitability by better integrating the brand with Verizon’s other products and by launching subscription-based services for premium content on Yahoo’s most popular site, Yahoo Finance.

Important

Verizon Media is currently undergoing a complete overhaul. Yahoo plays a central role in this reconfiguration.

Subscription Services

In June 2019, Yahoo Finance launched a subscription service called Yahoo Finance Premium that provides investors with premium content. These include premium data and charting, advanced portfolio analytics, research reports and investment ideas, and company profiles. The site also allows investors to link their pre-existing eTrade accounts to their Yahoo Finance account. Although the service has already launched, some of these features are still being fully fleshed out.

The service comes at a price of $49.99 per month.

Note

Verizon Media also launched a similar subscription program for Huffpost.

Inbox Commerce

Yahoo has also just launched an updated version of the Yahoo Mail app, which they call a “super-app.” This update centers around a new “Deals” tab in the app, which offers individualized online shopping offers to users. Verizon Media’s CEO, Guru Gowrappan, calls this “enabling commerce through mail.” This update will hopefully provide space for Yahoo to sell more ads inside one of its platforms. In doing this, Yahoo is betting on users who are already faithful to Yahoo. This set-up could offer some insulation from the fierce competition with Google, Facebook, and Amazon. 

Yahoo News XR Program and 5G

In November of 2017, Verizon Media launched a creative studio with immersive media company RYOT to create branded augmented reality (AR), virtual reality (VR) and 360-degree video content with corporate partners. It is perhaps Verizon’s most futuristic and exciting subsidiary. In April 2019, Yahoo News, Yahoo’s second most popular site, announced it would oversee a partner program between Verizon’s RYOT Studio and high-profile news organizations including Reuters, the Associated Press, and TIME. Through this program, RYOT and Yahoo News will supposedly help other news outlets create AR and VR news content.

Yahoo News plans to monetize this venture by infusing news content with the VR- and AR-branded content — read: ads — that RYOT has experience making. RYOT will also offer partners access to its software development kit, which makes the creation of VR and AR content more cost effective.

This studio also serves a flashy, modern project that integrates Verizon’s upcoming launch of its 5G network. This network will be integrated into all of Verizon Media’s products to raise their speeds. The RYOT studio is designed to show off what such speeds can do, and to encourage users to consume the studio’s data-intensive content using Verizon devices and apps. 

Important

Verizon is investing heavily in 5G. It aims to be the first company to offer 5G speeds.

Staff Cuts

Like all digital media companies, Verizon Media and Yahoo are currently doing all they can to weather growing instability in the industry. Earlier this year, Verizon Media cut 7% of its workforce.

Key Challenges

As already outlined above, Yahoo and Verizon Media are facing a lot of challenges. Here’s a recap.

• The organizational messiness caused by the simultaneous existence of Oath and Verizon Media have made it difficult for brands like Yahoo to respond to the challenging business environment of digital media.
• Yahoo’s brand pales in comparison to other companies that offer virtually the same products. It is hard to imagine a world in which Yahoo manages to compete with the likes of Google, Facebook, and Comcast much longer.
• Verizon Media has struggled to hold on to the small market share it had in digital ads a few years ago, and unless its new products catch on, it’s likely to lose more.

Reviewed by Somer Anderson
Fact checked by Timothy Li

Goodwill refers to non-physical items that can increase a company’s market valuation. It comes in a variety of forms, including reputation, brand, domain names, intellectual property, commercial secrets, among other intangible assets.

Assigning a numeric value to goodwill can be challenging because these assets are non-quantifiable. However, the need for determining goodwill often arises when one company buys another firm, a subsidiary of another firm, or some intangible aspect of that firm’s business.

Key Takeaways

• Goodwill is an intangible asset, and it comes in a variety of forms, including reputation, brand, domain names, and intellectual property.
• The need for determining goodwill often arises when one company buys another.
• Goodwill is calculated as the difference between the amount of consideration transferred from acquirer to acquiree and net identifiable assets acquired.

History of Goodwill

The concept of goodwill in business affairs goes back at least a century. One of the first definitions of it appeared in “Halsbury’s Laws of England,” a comprehensive encyclopedia that dates from 1907. The current “Halsbury’s” (4th edition, Vol. 35), states that:

“The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possess.”

In listing goodwill on financial statements today, accountants rely on the more prosaic and limited terms of the International Financial Reporting Standards (IFRS). IAS 38, “Intangible Assets,” does not allow the recognizing of internally created goodwill (in-house-generated brands, mastheads, publishing titles, customer lists, and items similar in substance). The only accepted form of goodwill is the one that is acquired externally, through business combinations, purchases, or acquisitions.

For example, in 2010, Facebook (META), now Meta, bought the domain name fb.com for $8.5 million from the American Farm Bureau Federation. A domain name’s sole value is the name, or (in this case) the initials. That means the entire amount paid for it can be considered goodwill, and Facebook would have recognized it as such on its balance sheet. However, before the acquisition, the American Farm Bureau Federation could not recognize fb.com as goodwill on its balance sheet—goodwill has to spring from an external source (not an internal one).

Calculating Goodwill

According to IFRS 3, “Business Combinations,” goodwill is calculated as the difference between the amount of consideration transferred from acquirer to acquiree and net identifiable assets acquired. The general formula to calculate goodwill under IFRS is:

$begin{aligned} &text{Goodwill} = left(C + NCI + FVright) – NA\ &textbf{where:}\ &C = text{Consideration transferred}\ &NCI = text{Amount of non-controlling interest}\ &FV = text{Fair value of previous equity interests}\ &NA = text{Net identifiable assets} end{aligned}$​Goodwill=(C+NCI+FV)−NAwhere:C=Consideration transferredNCI=Amount of non-controlling interestFV=Fair value of previous equity interestsNA=Net identifiable assets​

Non-Controlling Interests in the Goodwill Calculation

The method to calculate goodwill is straightforward, but challenges can occur when measuring one of the variables: non-controlling interest (NCI). The amount of NCI plays a significant role in the goodwill-calculation formula. A non-controlling interest is a minority ownership position in a company—meaning the position is not substantial enough to exercise control over the company.

Under IFRS 3, there are two methods for measuring non-controlling interest:

1. Fair value or full goodwill method
2. Non-controlling interest’s proportionate share of the acquiree’s net identifiable assets

These two methods can yield different results.

For example, suppose company A Inc. acquires B Inc., agreeing to pay $150 million (the consideration transferred) to obtain a 90% interest in B Inc. The fair value of the non-controlling interest is $16 million. Assume that the fair value of net identifiable assets to be acquired is $140 million and that no previous equity interests exist.

Using the first method of measuring NCI, the amount of the goodwill is $26 million ($150m + $16m – $140m).

Under the second method of measuring the NCI, we take into account the 10% of B Inc. that A Inc. didn’t acquire. As a result, the goodwill value is $24 million ($150m + [140m x 0.1] – $140­m). Thus, there is a difference of $2 million between the amount of the goodwill calculated under the two methods.

Special Considerations

Although goodwill is the premium paid over the fair value of an entity during a transaction, goodwill’s value cannot be sold or bought as an intangible asset by itself. 

It can be challenging to determine the price of goodwill because it is composed of subjective values. Transactions involving goodwill may have a substantial amount of risk that the acquiring company could overvalue the goodwill in the acquisition—and, ultimately, pay too much for the entity being acquired. 

However, despite being intangible, goodwill is quantifiable and is a very important part of a company’s valuation.

What Is the Formula for Calculating Goodwill?

According to IFRS 3, “Business Combinations,” the formula for calculating goodwill is: Goodwill = (Consideration Transferred + Non-Controlling Interest + Fair Value of Previous Equity Interests) – Net Identifiable Assets

How Is Goodwill Different From Other Assets?

Like other assets, goodwill can show up on a company’s balance sheet (but only when two companies complete a merger or acquisition). However, unlike some other assets, goodwill is intangible. It is not a physical asset like buildings or machinery. Another difference is that it has an indefinite life (as long as the company operates). Other assets have a definite useful life, and, as such, they are amortized: A fixed amount is marked down every year, resulting in a simultaneous charge against earnings.

What Is an Intangible Asset?

Goodwill refers to the value of certain non-monetary, non-physical resources, such as customer loyalty and brand reputation. While customer loyalty and brand reputation are certainly intangible, on a company’s balance sheet, an intangible asset refers to something else. An intangible asset is non-physical but identifiable. Examples include a company’s proprietary technology (computer software, etc.), copyrights, patents, licensing agreements, and website domain names.

The Bottom Line

Goodwill is a non-physical item, such as a brand name or intellectual property, that contributes to the value of a company. It is assessed when a firm buys another firm or buys some part of that firm’s business; it cannot be sold, purchased, or transferred separately. The formula for calculating goodwill is: Goodwill = (Consideration Transferred + Non-Controlling Interest + Fair Value of Previous Equity Interests) – Net Identifiable Assets.