Yahoo to Lose Contract With AT&T

Yahoo stock dives on news of AT&T loss By MICHAEL LIEDTKE, AP Business Writer

Yahoo Inc.'s recently resurgent stock retreated by more than 5 percent Friday amid fears that a setback in a lucrative partnership with AT&T Inc. will undercut the anticipated gains from an overhaul of the Web portal's advertising platform.

The sell-off was triggered by an unconfirmed report in The Wall Street Journal that AT&T wants to stop giving Yahoo a slice of the subscriber fees from a 6-year-old co-branding agreement to sell Internet access in most of the country.

If AT&T gets its way, Yahoo would have to be satisfied with whatever money it could make by selling its own online products, such as digital music or matchmaking services, to subscribers of the joint service.

In a statement issued late Friday, San Antonio-based AT&T and Sunnyvale-based Yahoo said they are constantly examining ways to adapt to changing market conditions. Neither company addressed the substance of the Journal's report, which the statement described as "speculation."

"As we continue our conversations, we have a common goal to increase the economic benefits for both parties," Yahoo Chairman Terry Semel said.

By the time Semel weighed in, investors had already drawn their own negative conclusions. Yahoo shares dropped $1.59, or 5.2 percent, to close at $29.12 on the Nasdaq Stock Market.

Before Friday's downturn, Yahoo's stock had climbed by 20 percent this year, rebounding from a horrible 2006 performance. That reflected Wall Street's widespread belief that Yahoo will prosper from a month-old upgrade to its formula for linking ads to search requests.

But a reshuffling of the AT&T deal would deliver a substantial blow.

Under the current terms of the contract, AT&T is believed to pay Yahoo $200 to $250 million annually, accounting for more than 25 percent of the $798 million in total fees that the Internet powerhouse collected last year. Most of Yahoo's revenue -- which totaled $6.4 billion last year -- comes from advertising.

Compounding the pain, Yahoo's profit margins on the AT&T partnership are much higher than on many of its other services because the telecommunications carrier handles most of the heavy lifting.

Standard & Poor's analyst Scott Kessler estimated the AT&T deal generated somewhere between $30 million to $70 million, or 2 to 5 cents per share, of Yahoo's 2006 profit of $751 million.

Analysts expect Yahoo to earn nearly $780 million, or 54 cents per share, this year.

The damage to Yahoo could be worse if its other major Internet access partners -- Verizon Communications Inc., BT Group PLC and Rogers Communications Inc. -- follow AT&T's lead when they renegotiate their contracts.

Yahoo hasn't publicly disclosed the length of the contracts with its Internet access partners, but the AT&T alliance reportedly expires in April 2008.

Friday's news woke up many investors who thought Yahoo had turned the corner after slowing revenue growth and competitive challenges posed by increasingly popular Internet hangouts like contributed to last year's 35 percent decline in Yahoo's stock price.

An improved advertising system known as "Panama" -- unveiled Feb. 5 after a three-month delay -- has become the foundation for Yahoo's turnaround hopes. The upgrade is supposed to begin boosting Yahoo's profit in the second half of this year -- a prospect that now looks shakier, Kessler said.

"A lot of people have gotten scared again and are starting to realize that they have been pinning their hopes on the promise of something that is still uncertain," he said.

Copyright 2007 The Associated Press.

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[TELECOM Digest Editor's Note: I saw this when it started, several years ago; first there was 'Yahoo whatever' then it switched to '(telco) Yahoo' and you had to use telco's DSL to get Yahoo to work correctly. I am reminded of the middle age man and woman who had a very good thing going with their little home 'cottage industry' factory making trinkets of some kind or another. Then _Walmart_ got interested. Walmart agreed to sell the trinkets but only on the condition this man and woman were the sole suppliers.

The couple were thrilled to death to get that Walmart supplier contract! Where they had been selling a few dozen trinkets each month, and making a modest, but decent living, now they would be making

*much* more money. Business got to be so good for them, they wound up having to drop many of their old established customers; no time nor resources to handle them. But that was okay, the Walmart business would offset the loss of a 'few' of their older customers. All went well for a few years, then one day Walmart decided to change the payment terms. Instead of payment in 30 days, it would now be payment in 60 days. Then, it eventually got to the point that Walmart decided this couple would no longer be the sole supplier; i.e. they would have to compete with other makers of trinkets. Eventually, the couple wound up going out of business; Walmart would not help them any.

Lesson to be learned is _never_ allow your business to become sole supplier of _anything_ to Walmart; (nor, telco for that matter; Yahoo was the exclusive supplier of network software to the telcos for quite a long time). I remember quite well, late 1980's, early 1990's how Yahoo was literally a small mom and pop type outfit. Basically, Southwestern Bell (the old name of the present AT&T) is going to damn near put them out of business from demands made upon them at one time or another. PAT]

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Michael Liedtke, AP Business
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