Verizon's Metamorphosis: Can You See Me As A Tech Giant Now?
If you walk around your city or town and keep your eye to the ground, you'll start noticing round metal lids embedded in the street.
That means underneath is an important utility, usually marked "water" or "sewer." But some of the manholes carry the relic logo of a bell; these mark the backbone of America's telecommunications.
And much of that infrastructure belongs to Verizon, the country's largest phone company. At least that's how you may think of Verizon: a child of a 20th-century phone monopoly.
But here's what else belongs to Verizon: TechCrunch, Engadget and TheHuffington Post. The telecom giant acquired those with its 2015 purchase of AOL for $4.4 billion. With another bargain purchase of Yahoo for $4.8 billion this year, Verizon will also own Tumblr and Flickr.
The telecom giant has been slowly sprawling into digital media. Apart from AOL and Yahoo, it has bought a data delivery company, EdgeCast; a video streaming startup, upLynk; and Volicon, which helps broadcasters put their content online.
Additionally, Verizon has a stake in:
The carrier has invested in original content, too. Its video app go90, for instance, has a reality TV show called The Runner,from executive producers Ben Affleck and Matt Damon. In it, a player tries to travel cross-country without getting caught by "chasers" or the viewers. According to The Wall Street Journal, the show was developed at ABC right before the Sept. 11 attacks and in 2006 was considered, but canned, by Yahoo.
All this is Verizon's effort to become a "top global media company," as CEO Lowell McAdam recently said on a quarterly call. (Verizon executives were unavailable for an interview.)
"We see tremendous opportunity in the digital video marketplace, which has an estimated addressable market of $180 billion by 2020," McAdam said.
The reason for the expansion is actually quite pragmatic.
"The telecom business is now demonstrably no longer a growth industry," says Craig Moffett, founder and senior analyst at MoffettNathanson. "It's kind of funny to get your head around the idea that wireless in the United States is a shrinking business."
For years, Verizon and other wireless carriers had a growing stream of income as they charged more for our increasing use of data. But now that just about everyone has a smartphone, we keep using more data — yet its price is falling. Moffett says bills are going down, not up.
In July, for the first time in six years, Verizon reported a decline in quarterly revenue.
"Verizon is, I think, rightly recognizing that trying to constantly extract more from the consumer for their service is pushing on a string," Moffett says. "If you're going to get more revenue per user, it's not going to come from the user [but] from someone else. ... That someone else is almost certainly going to have to be advertisers."
With Yahoo's Web real estate, Verizon will instantly propel to being the third-largest player in digital advertising. Except — it's effectively a two-player market, completely dominated by Google and Facebook.
And those two are in a different league. They have bigger piles of cash, face less regulation and don't have to deal much with physical things, like maintenance of cables or leases on cell towers.
"We're a small player today relative to them," CEO McAdam told investors. "All we need to do is take more than our fair share of the growth of the market and this will be a success for us, and we certainly expect to do better than that."
Though the digital ambitions are exciting for Verizon, they are still a relatively small part of its business, which at its core remains focused on wireless and Internet services, in their various iterations. Moffett says it's far from a transformational moment in the company's history.
"The story of wireless carriers getting out of their comfort zone is a story of bad outcomes," says Roger Entner, analyst at Recon Analytics. He points to Verizon's failed attempt to challenge Netflix with an investment in movie-streaming service Redbox Instant and the ongoing consideration of a sale of the data center company Terremark that Verizon bought in 2011 (yes, the one that hosted HealthCare.gov for a while).
"[Verizon's] investors are savvy enough to know what Verizon is and what it isn't. And fundamentally, Verizon is not a Silicon Valley startup and you can't pretend that it is," Moffett says.
"The question is: Where in the Internet ecosystem do they play?" he says. "Are they going to be largely an Internet content company? Are they going to be largely an Internet advertising company? The answer to both of those is almost certainly no. Are they going to be an Internet infrastructure company? Absolutely yes."
The Verizon of 2016 is not your father's phone company, but its DNA still runs through the cables beneath those metal lids.
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