Verizon Loses Pay TV Subs Amid Strike, CEO Touts Yahoo Deal, "Meaningful" Synergies

Associated Press

Lowell McAdam says the internet company will make the telecom giant a "major competitor in mobile media," talks about challenging Google and Facebook and signals there could be more acquisitions.

Telecom giant Verizon on Tuesday said it lost 41,000 net pay TV subscribers for its FiOS video service in the second quarter due to a seven-week work stoppage and outlined some of its thinking behind the $4.83 billion acquisition of Yahoo's core internet business.

After previously buying AOL and Millennial Media and last year launching millennials-focused mobile video service Go90, the company had on Monday unveiled its agreement to take over Yahoo.

“By acquiring Yahoo, we are scaling up to be a major competitor in mobile media," said Verizon chairman and CEO Lowell McAdam. "Yahoo is a complementary business to AOL, giving us market-leading content brands and a valuable portfolio of online properties and mobile applications that attract over 1 billion monthly active consumer views. We expect this acquisition to put us in a great position as a top global mobile media company and give us a significant source of revenue growth for the future.”

On the earnings conference call, McAdam expanded on this, saying: “We see tremendous opportunity in the digital video marketplace,” which has an estimated addressable market of $180 billion by 2020, with the ad market currently dominated by two brands (a reference to Google and Facebook). “Content creators and advertisers are hungry for alternatives as the market expands for both in-home and mobile consumption,” he said. “Verizon intends to be a significant player in this space.”

He acknowledged that a lot has been made of Verizon's apparent attempt to challenge Google and Facebook. But McAdam downplayed that a bit, saying: "I just say look, we plan on being a significant player here...we are a small player today relative to them. All we need is take more than our fair share of the growth of the market, and this will be a success for us."

Asked if Verizon was done with digital acquisitions after the Yahoo deal and would reduce its capital spending, McAdam said: "I hope not, because if we do, then we are standing still. And this is such a dynamic environment, we should be looking for additional things to meet customers' needs. I fully expect when [AOL CEO] Tim [Armstrong] and [Yahoo CEO] Marissa [Mayer] put their heads together, we'll have a long list, and we will be disciplined as we always are, and there will be good investments that will drive us to take a larger share of this growing market."

McAdam also told analysts that there would be “meaningful” financial synergies in the Yahoo deal, adding that Verizon was likely the only bidder with real such opportunities, but he didn’t detail any figures on Tuesday. He said the company would instead  focus on those issues, validate its plans over time and finalize and unveil details closer to the deal closing.

The CEO on Tuesday also lauded Yahoo’s online brands and mobile apps, “market-leading content” and its asset that he said would expand Verizon’s analytics and ad tech capabilities. Overall, Yahoo “enhances our competitive position and value proposition to advertisers,” McAdam said. “Yahoo’s operations complement AOL’s business, as well as our overall asset portfolio.”

He mentioned sports as a key focus area in terms of content, saying he'd talked to the bosses of the NFL and NBA about the Yahoo deal and hinted at possible new in-season or out-of-season offers in partnership with sports leagues. TV networks with sports rights could also team with the company on streaming offers via AOL, Yahoo, FiOS or Go90, McAdam suggested. “We view this as a waterfall of content moving down through our different properties,” he said.

In addition to sports, news and finance are also content areas that will provide new opportunities for the combined Verizon-Yahoo, McAdam said. “We have a lot of the relationships well established,” which can only benefit Yahoo, he said.

Overall, McAdam said the Yahoo deal will allow the company to create “long-term value” and make Verizon “a top global media company,” providing an "exponential leap" in its capabilities.

Verizon's earnings report Tuesday showed its first-ever quarterly FiOS video subscriber loss, compared with a net gain of 26,000 subs in the year-ago period, a gain of 36,000 in the first quarter and growth of 20,000 in the fourth quarter of 2015, which had marked the previous low point in terms of sub momentum for the service in any quarter since its launch in 2006.

The firm ended the second quarter with a total of 4.64 million subscribers to its FiOS video service, which competes with cable and satellite TV companies. "Verizon made significant progress in working through a backlog of FiOS installations in June and has since returned to its normal run rate of FiOS connection growth," the company said. Verizon also said that its Custom TV "skinny" pay TV bundle accounted for 40 percent of FiOS video sales in the second quarter.

Verizon also reported Tuesday that it lost 13,000 net new FiOS broadband subscribers in the second quarter due to the strike, compared with a gain of 98,000 in the first quarter and 72,000 in the second quarter of last year. It ended June with 5.50 million broadband connections.

Verizon also said that AOL delivered "strong revenue growth" in the second quarter, but didn't break out further details.