AT&T, Yahoo downplay report partnership at risk
By Ritsuko Ando and Eric Auchard Fri Mar 9, 7:43 PM ET
NEW YORK/SAN FRANCISCO (Reuters) - AT&T Inc. (NYSE:T - news)and Yahoo Inc. (Nasdaq:YHOO - news) are negotiating how they could expand a broadband promotion deal to cover mobile Internet services and advertising, a source familiar with the talks said on Friday.
The source, who was responding to a report in the Wall Street Journal that said Yahoo was at risk of losing revenue of up to $250 million a year when the AT&T contract comes up for renewal next year, said new ties could offset any such threat.
Fearing the partnership could be in danger, investors drove down Yahoo shares 5.2 percent in Nasdaq trading.
Current discussions focus on a potential mobile phone deal with AT&T's mobile unit, Cingular, the largest U.S. cellphone company, where Yahoo would provide advertising, Web search and other services along the lines of the contract Yahoo struck late last year to act as exclusive provider of advertising for Vodafone mobile phone customers in Britain, the source said.
"It is pretty obvious that the next new thing is mobile services and advertising," the source said.
In a joint statement issued on Friday afternoon, AT&T and Yahoo said Yahoo also would be providing services on AT&T's Internet television service later this year.
"AT&T and Yahoo have already made adjustments over the years to reflect competitive conditions and the relative benefits each party brings to the relationship," Yahoo Chairman and Chief Executive Terry Semel said.
"As we continue our conversations, we have a common goal to increase the economic benefits for both parties."
Goldman Sachs analyst Anthony Noto estimated the AT&T deal provides Yahoo with $210 million to $290 million per year in subscription and advertising revenues.
Doubts raised by the report came as an unexpected blow to Yahoo, which has been rebounding from a series of business missteps that caused shares to lose 35 percent last year.
Ahead of the Journal report, Yahoo shares had risen around 13 percent head in the year to date. Investors are betting on stronger growth this year and next, following a major upgrade of its Web search advertising system last month.
Yahoo spokesman Mark Plungy labeled the Journal story "rumor and speculation" and confirmed talks continue.
"AT&T and Yahoo's ongoing partnership is rooted in the open and ongoing dialogue we maintain about future opportunities," he said.
The two partners introduced advertising on the front page of their joint broadband marketing site earlier this year. Later this month, Plungy said, Yahoo is introducing advertising on their co-branded e-mail service for high-speed customers.
Further mobile ties remain under negotiation.
"We are discussing ways to expand our partnership in the mobile arena, now that AT&T has 100 percent ownership of Cingular," he said.
Yahoo shares closed down 5.2 percent at $29.12 on Nasdaq. AT&T closed up 4 cents, or 0.1 percent, at $36.55 on the
New York Stock Exchange.
AT&T, formerly known as SBC Communications, struck a broadband marketing partnership in 2001 in which SBC pays Yahoo a small cut for each high-speed Internet access customer in return for Yahoo building and managing Web services for customers. The deal covers AT&T customers in the 13 states where the top U.S. phone company offers local phone service.
Yahoo has similar broadband deals with major phone companies Verizon Communications (NYSE:VZ - news) and BT Group Plc (BT.L) and Canadian cable Rogers Communications (Toronto:RCIB.TO - news).
The Wall Street Journal highlighted how rivals Google Inc. (Nasdaq:GOOG - news) or Microsoft Corp. (Nasdaq:MSFT - news) in the past year have struck a series of high-profile deals where they pay major computer and media companies for the privilege of marketing services to their partners' customers, reversing the trend of five years ago when AT&T and others agreed to pay Yahoo.
"Yahoo is likely in jeopardy of losing its AT&T deal, or at least a reworking of the deal that could materially scale back the relationship," analyst Scott Devitt of broker Stifel Nicolaus warned in a research note to clients issued Friday.
But the source close to the talks said the existing broadband contract includes a provision that AT&T customers who have signed up for the service would remain Yahoo customers for ads and Web services, whether or not AT&T chooses to renew.
Hence, the risk to existing revenue streams is low. Furthermore, Yahoo and AT&T are already focused on new areas such as mobile and TV partnerships as broadband use has become more widespread and growth in new customers has peaked.
(Additional reporting by Mark Porter in New York)