Will broadband deals leave Yahoo behind?

The Web portal watched from the sidelines last week as the future of high-speed Internet services began to take shape with Microsoft's $5 billion investment in AT&T. That move left the battle lines clearer, with AT&T and Microsoft falling on one side and the AOL-Netscape-Sun alliance on the other.

The deal's implications trickle down to any number of industries, and the portal space is no exception. Two of Yahoo's portal competitors--Excite and MSN.com--are now orbiting AT&T's broadband universe. Excite, which was acquired by cable Internet access provider @Home Network, is expected to become the face of the @Home network. And MSN is positioned to distribute of its content and services, such as MSN Hotmail or MSN Expedia, through cable lines.

Now that its adversaries are forming definitive deals, the question arises whether this week's developments will force Yahoo's hand in lining up with a broadband partner. Moreover, if Yahoo decides not to make a move now, will it get shut out?

In essence, the two main factions that are emerging parallel the battle between cable and digital subscriber lines (DSL) for dominance in the high-speed access race. Microsoft's investment in AT&T puts it in the cable camp for now, while America Online's partnerships with Baby Bells SBC Communications and Bell Atlantic place it on the DSL side. Both sides are lining up to offer consumers an all-in-one package of high-speed Internet access bundled with communications features such as local phone service.

Until now, Yahoo has maintained its desire to remain "agnostic" on how it will bring its broadband offering to consumers. However, the company indicated to analysts at a meeting in May that its stance could change this year.

"Yahoo has yet to strike a distribution deal with a broadband service," Hambrecht & Quist analyst Paul Noglows wrote in a report following the meeting. "Expect this to change, however. Yahoo management suggested that they intend to strike a broadband distribution deal by the second half of this year."

According to Yahoo president Jeff Mallett, the company is not interested in stepping into the Internet access game via an investment in or acquisition of an ISP or other access firm.

"No thank you," Mallett said. "That's a tough business, and we don't believe that owning an access point is a competitive advantage, but a disadvantage."

Rather, Yahoo is looking to hang on to its dominant position as the portal Web users visit regardless of how they get onto the Internet, Mallett said. He added that it will be Yahoo's brand, its position in the marketplace, and its compelling offerings that will continue to attract millions of Web users.

Survival of the fittest
However, as competitors such as Excite and MSN gain strength through their broadband alliances, they also begin to add offerings other than content and Web searches. In a sense, it's an evolution analogous to the growth of the portals themselves, which began as simple search engines and became giant sites full of add-on services such as free email and instant messaging in an effort to gain market share. The broadband alliances allow the portals to be an add-on themselves--part of a package that includes access, e-commerce, content, and services.

Up to now, Yahoo has excelled on the portal front primarily because it continues to attract million of visitors who flock to the site to check email, perform Web searches, or look up stock quotes. Yahoo today attracts 60 million users worldwide, and has a 47 million-strong registered user base.

According to some analysts, the challenge Yahoo faces is how it can convince new Web users to go to its site. If a new Web user signs onto an AT&T package, why would he or she go to Yahoo when they already have an all-in-one bundled package with its own portal?

"I think they need a fall-back strategy for access," said Mike West, an independent market analyst and consultant.

"It's a lot easier to package through cable," said West. "If you distribute it through TCI, it's very easy to bundle a promotional connection into the Internet and capture them for Excite or MSN."

West added that Yahoo needs to give new Web users a compelling reason to visit its site besides hoping they are attracted by the Yahoo brand. West said Yahoo would benefit from offering its own competitive package of services, such as its own ISP, to get new users online with Yahoo as their Internet brand.

A question of value
However, some analysts are not convinced that these new developments will pressure Yahoo to rethink its current media strategy and make an access play. Rather, the new landscape could be a boon for Yahoo since it can leverage its audience base as a way to strike distribution deals with broadband providers.

"At the end of the day, what Yahoo has of real value is its tremendous traffic," said Hambrecht & Quist's Noglows.

Noglows added that broadband providers can market their services to Yahoo's audience base. "Yahoo has 47 million registered users," he said. "That will be of significant value for any type of broadband provider."

Hany Nada, an equity analyst at U.S. Bancorp Piper Jaffray, said it would behoove Yahoo remain a media play rather than an access point.

"I think they've got a tremendous amount of leverage to get the customer from any on-ramp to downtown Yahoo," Nada said.

For now, Yahoo's plans to maintain the status quo for its broadband strategy. It will continue to strike deals with all types of broadband platforms such as cable, DSL, and satellite, and it will keep building up its brand to attract users from any speed on any platform.

Mallett said Yahoo later this year will announce a number of broadband distribution deals. Some will be structured similarly to its deal with AT&T WorldNet, where users get WorldNet ISP access bundled with a Yahoo cobranded home page. Others will be structured in new ways, he said, declining to give more details.

Mallett insisted that Yahoo would not be shut out, though its competitors "would love that to happen," because demand for the portal will remain strong.

"What's the extreme? They turn it into a closed-loop network and offer a second-rate offering like Excite? That ain't gonna happen," Mallet said.