Yahoo set to take speed challenge

Sources close to the company said Yahoo and SBC will launch a co-branded DSL (digital subscriber line) service by early next week, rebutting doubters who had suggested the product might not get off the ground before the end of the year.

Now comes the hard part: Yahoo enters an arena littered with deals gone bad, from the spectacular blowout of Excite@Home, to its own earlier failed dial-up offerings with partners including MCI Internet and AT&T.

History aside, the potential rewards may well be worth the risks. With the broadband deal, Yahoo CEO Terry Semel hopes to create a springboard to sell a lucrative new class of high-speed Net services, such as online music subscriptions--which have thus far failed to take off.

Even naysayers admit there may be a strategic significance to the deal if the two companies can carry out the plan.

"It makes sense from a practical standpoint," said Derek Brown, an analyst with WR Hambrecht who has a "sell" rating on Yahoo's stock. "It has the potential to create a tighter bond between Yahoo and its customers. For Yahoo to establish a clear billing relationship with potential customers is something they've been after for quite a long time."

Yahoo spokeswoman Helena Maus said the company is still planning to launch its DSL product by the end of the month. She declined to comment on the possibility of a launch early next week.

Yahoo's broadband strategy dovetails with a broader corporate makeover under way at the Web portal that aims to wean the company from its heavy reliance on advertising. During a meeting with Wall Street analysts last November, Yahoo executives outlined a recovery plan in which they would lessen ad dependence through acquisitions and the introduction of paid services.

So far, this plan seems to be working. Last quarter, Yahoo reported 1 million registered paying customers, many of whom purchased additional offerings for e-mail, personals and data storage. The changes have reduced Yahoo ad dependence from some 90 percent of revenue in 2000 to 60 percent this year.

But while nonadvertising revenue went up, Yahoo's core business of selling advertising continued to struggle. Most of the company's revenue growth in recent months can be directly attributed to two deals: a takeover of job listing site HotJobs.com and a deal with pay-for-placement Web search company Overture Services.

The need for speed
The new DSL service, announced last November, comes after a dial-up offering between the two companies that launched in June. According to previous announcements, the service will bundle SBC's DSL offering with an interface programmed by Yahoo.

The partnership has been touted by Yahoo as a means for the company to tap nonadvertising revenue because the deal terms would offer a cut of subscription dollars to the Web portal.

Creating a monthly billing relationship with customers could also make it easier for Yahoo to market incremental services, impulse buys and "micropayment" transactions that are more difficult to sell if customers are required to enter credit card account information each and every time.

Yahoo has not disclosed new details of the partnership. But in past announcements, the company has said it would include a DSL connection with a co-branded, customized Internet Explorer Web browser, as well as fee-based premium services. Some of the services bundled could include extra e-mail storage, extra photo storage and a revamped version of Yahoo's Launch Web radio player.

Yahoo will receive a percentage of subscription revenue and will share advertising sold on the service with SBC. Pricing and terms have not been announced. SBC has recently said it plans to introduce tiered DSL pricing plans this fall, although exact prices have not yet been determined.

Despite big hopes for broadband, some Wall Street analysts have begun to question whether Yahoo would hit the partnership's revenue projections as outlined by company executives. Yahoo has told Wall Street that the SBC deal would provide the company with up to $30 million in revenue--not counting the additional take expected from new paid high-speed services.

Recently, however, a few analysts have questioned whether Yahoo would have enough time to meet those expectations given the mid-September launch date.

On Tuesday, WR Hambrecht's Brown downgraded his revenue estimates for Yahoo, citing revenue concerns from weak online advertising, a decline in the company's HotJobs business and speculation that the SBC partnership would fall short of expectations.

"My question has never been about the direction of the partnership; it's simply been the timing and the impact it might have on the company's financials," Brown said.

The competitive challenge
Among other challenges, Yahoo faces competition in offering a combination of high-speed content tied to DSL and other high-speed Net services.

Yahoo's main rivals, namely America Online and Microsoft's MSN, also view broadband as a way to sell more products to subscribers. The question remains what kinds of services will be compelling enough for people to pay extra fees on top of their existing broadband accounts.

Some companies such as AOL have pinned their hopes in exclusive content and programming, while Microsoft believes software services will drive people to subscribe.

MSN partnered in June with Verizon Communications to create a "new kind of DSL service" aimed at giving subscribers services and content with high-speed Internet access, according to a statement by Microsoft CEO Steve Ballmer. That service is expected to launch in early 2003 and cost $39.95 to $49.95 a month, depending on a subscriber's location.

Microsoft also offers its MSN broadband service for $49.95 a month in partnerships with SBC, BellSouth and Qwest Communications International.

Meanwhile, AOL struck a deal this month with troubled broadband provider Covad Communications to buy wholesale DSL services.

The Covad deal is just one push by parent company AOL Time Warner to beef up America Online's broadband business. AOL Time Warner recently announced a deal to spin off its cable unit as a separate company later this year and to offer broadband service over AT&T Comcast's cable systems.

AOL High Speed Broadband service over cable modem is $31.05 a month, in addition to a monthly $23.90 fee for unlimited AOL dial-up, plus taxes and other service fees.

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Some analysts were skeptical about whether the SBC deal would be different from Yahoo's former ISP partnerships.

"We don't have any indication that Yahoo can do that," said First Albany analyst Youssef Squali. "We haven't seen any numbers about how successful their dial-up business has been. This could be a show-me story for Yahoo."