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Verizon Faces Uphill Climb Against Google, Facebook

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Verizon Communications' planned purchase of Yahoo! for $4.83 billion in cash would make the telecom giant the clear No. 3 player in the U.S. digital ad market. However, gaining ground on Google and Facebook could prove difficult. 

While Yahoo generates significant digital ad revenues across search and display formats, the company has steadily surrendered market share since early 2012 and has failed to benefit from a booming U.S. digital ad market in 2014 and 2015. Verizon's rollup of assets including AOL, Millennial Media, and Yahoo could give it a strong presence across numerous content verticals and digital advertising formats, but luring ad dollars away from Google, Facebook and others may be challenging.

The combination of AOL and Yahoo would create a clear top three in the U.S. digital ad market by revenues — Google, Facebook and AOL/Yahoo — although the growth trajectories since 2014 look quite different. Quarterly revenues for Google and Facebook have steadily marched higher since the first quarter of 2014, while revenues for a combined AOL/Yahoo show steadily worsening annual declines for each quarter since the third quarter of 2015. 

Facebook and a combined AOL/Yahoo generated roughly the same amount of U.S. digital ad revenue in the first quarter of 2014, but the gap exploded as of the first quarter of 2016, with Facebook's estimated $2.48 billion in U.S. ad revenue nearly 3x the $856.8 million in ad revenue that a combined AOL/Yahoo would have generated.

Estimated US digital ad revenue for leading publishers

Righting the Yahoo ship and the steady erosion in its ad business may prove challenging, as Yahoo has already invested heavily in building out a full ad tech stack across major ad formats — including its BrightRoll video ad platform purchased in early 2015 for $640 million — and has a sizable audience of more than 1 billion monthly active users and 600 million monthly active mobile users. 

Incorporating first-party data from Verizon for its wireless customers could help with targeting some Yahoo advertising, but it does not address one of Yahoo's core issues: an aging user base that generates far less targetable social graph data compared to rivals. 

While the web-portal approach popularized by AOL and Yahoo in the 1990s continues to attract large audiences, many advertisers are increasingly targeting millennials and younger demographics that can be reached at scale through targeted ad buys at Google and Facebook.

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