Verizon's Proposed Buy of Yahoo Raises New Round of Privacy Questions

Verizon is buying Yahoo’s operating business for $4.83 billion in cash, “subject to customary closing adjustments,” the companies said Monday. The deal is expected to be approved by regulators (see 1606070054), but privacy advocates raised concerns after it was announced. The FCC is considering privacy rules for ISPs, with a final order expected to be adopted under Chairman Tom Wheeler (see 1607070052).

The news release on the deal mentions Yahoo’s online advertising capabilities, saying the Yahoo assets will be merged with AOL assets bought last year, under Marni Walden, president of Verizon’s Product Innovation and New Businesses organization. “Yahoo informs, connects and entertains a global audience of more than 1 billion monthly active users -- including 600 million monthly active mobile users through its search, communications and digital content products,” the release said. “Yahoo also connects advertisers with target audiences through a streamlined advertising technology stack that combines the power of their data, content and technology.”

“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers,” said Verizon CEO Lowell McAdam. “The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.”

The deal gives Verizon “scale and that's what's most critical here,” Walden said on CNBC’s Squawk Box Monday. "We go from being in the millions of audience to the billions,” she said.

Jeff Chester, executive director of the Center for Digital Democracy, said regulators should take a close look at the transaction. “Regulators should closely scrutinize the Yahoo deal to prevent anticompetitive practices related to Verizon’s ability to leverage its mobile and geo-location consumer data,” Chester said in an emailed statement. “The FCC should also impose strict safeguards that prevent Verizon from combining Yahoo data with what it already knows about its customers and consumers.”

Chester also urged the FCC to move forward quickly on the ISP privacy rules. “As broadband network monopolies such as Verizon merge [with] online ad giants, new threats to consumer privacy emerge,” he said. “That’s why action [on] FCC Chairman Wheeler’s privacy proposal is required. The Obama Administration and the FCC must ensure that deals like Verizon/Yahoo don’t further erode the little privacy Americans enjoy today when they use digital media.”

FCC Should Complete Rulemaking

The deal points to the importance of the FCC completing the privacy rulemaking, said Dallas Harris, policy fellow at Public Knowledge. “In the 21st century digital marketplace, it is important for regulators to consider the growing impact that these mergers have on consumer’s privacy. Privacy is a complicated issue, and we hope that the agencies with jurisdiction over the merger will give implications on consumer privacy the attention it deserves.”

“The acquisition of Yahoo’s assets is a drain on cash that reinforces the likelihood Verizon will not be a huge bidder in the ongoing incentive auction for TV band spectrum,” emailed Michael Calabrese, director of the Wireless Future Program at New America. “Verizon is focusing instead on inexpensive small cell and unlicensed spectrum to densify capacity in high-traffic urban areas and venues. We just hope Verizon’s investment in content is not premised on a belief it can continue to violate network neutrality rules and favor its own mobile video content over rivals.”

Jonathan Chaplin, analyst at New Street Research, said in a research note that the deal will help Verizon's content strategy, but the money would have been better spent on wireless.

“Critics of this deal would be hard pressed to find a single telecom merger they do like,” said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. “The efficiencies from this sort of vertical integration are blessed by economists, and this merger will be approved as easily as AOL was.” Questioning the deal “only makes sense if you assume better, more targeted advertising is always a bad thing,” Brake said.

Edge services always have been more profitable than carriers in terms of return on invested capital, said Richard Bennett, network architect and free-market blogger. “Nobody is more acutely aware of this than the carriers, so they’re understandably interested in expanding their businesses in the unregulated zone. The combination of Yahoo and AOL combines content with a robust ad network, which is good for corporate earnings, but it has very little to do with Verizon’s carriage business.”

“Verizon's acquisition of Yahoo shows the effect of increased regulation,” said Roger Entner, analyst at Recon Analytics. “You invest in unregulated businesses.” Verizon faces fewer restrictions in its use of data from the Yahoo/AOL “side of the house” than it does from its telecom assets, he said.

“I don't think the FCC will formally review the merger, so that's positive for Verizon because this FCC rarely passes up an opportunity to use a merger to 'regulate by condition,’” said Randolph May, president of the Free State Foundation. “But I certainly wouldn't be surprised to see Wheeler try to use the Yahoo merger as rationale for rushing to implement regulations more stringent than the FTC's like those he has proposed. You'll hear a lot of cries from the so-called public interest organizations in the context of this proposed merger about 'monopolies' and 'leverage' but not much about the present market power of the Googles of the world. Wheeler seems to be especially receptive to the public interest organizations' rhetoric, even when the evidence points in the other direction."

All assets weren’t on the table. Yahoo retains a 35.5 percent of Yahoo Japan, and 15 percent of Chinese e-commerce company Alibaba, the companies said.