Yahoo feels the pressure of AT&T alliance

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Shares in Yahoo, the internet portal, were marked down more than 5 per cent on Friday morning after it emerged that AT&T was trying to renegotiate a five-year-old agreement under which the US telecoms giant has sold its broadband DSL service under the joint AT&T Yahoo brand name.

The negotiations between the two companies reflect the realities of a shifting power balance, not only between the two companies, but also between telecommunications groups and the internet portals that dominated early attempts to commercialise the worldwide web.

“From 2001 to 2004, the companies that had the clout online were the Yahoos of the world,” said Scott Kessler, an analyst at Standard & Poor’s. “Now [telecoms] companies have millions of broadband subscribers. Frankly, they need to rely considerably less on Yahoo to acquire customers.”

Since the partnership was announced in 2001, AT&T has been strengthened by a series of acquisitions, including the purchase of BellSouth for $68bn in 2006, while Yahoo has stumbled amid concerns that it is losing ground to its arch-rival Google in the lucrative market for internet search.

Underscoring the shift in the balance of power between the two partners, AT&T is believed to have even considered buying Yahoo, whose share price has been under pressure for some time.

Yahoo’s stock price, which fell about 40 per cent last year, had bounced back in recent months following better-than-expected fourth-quarter results and the apparently successful launch of a long-awaited search advertising overhaul.

But Yahoo’s shares fell 5.2 per cent by the close in New York, wiping out nearly $8bn in market value.

Both AT&T and Yahoo declined to comment on their future plans on Friday, saying only that they “frequently collaborate” on their existing partnership.

But a person familiar with the situation on Friday confirmed that AT&T and Yahoo were re-examining the terms of their alliance – the biggest of several such deals Yahoo has struck since the beginning of this decade.

The deals are thought to contribute as much as $800m in total to Yahoo’s top line each year, according to Mr Kessler at S&P.

Under the original deal, SBC Communications – now renamed AT&T – and Yahoo shared broadband DSL revenues.

The agreement is reportedly generating more than $200m a year for Yahoo.

“People are doing the math and saying, ‘wow, this has an impact’,” Mr Kessler said. However, he said it was premature to assume that all of the revenue and profit Yahoo derives from the partnership would disappear once the companies reached a new agreement.

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