The deal will create a co-branded online access service with more than 1.2 million high-speed Net customers, vaulting Yahoo into the ranks of the top Internet service providers. The service will also inherit 3.6 million dial-up customers from Prodigy Communications, which SBC recently bought.
As previously reported by CNET News.com, Yahoo has been gauging consumer demand for a branded high-speed Net access service since at least last month.
The Web portal has had arrangements to sell Net access in the past. But this is the first time a powerful partner has agreed to switch its entire subscriber base to the Yahoo brand, a sign that the companies realize their limitations in a world where controlling both content and access is increasingly important.
"SBC is looking for a portal partner that could bring it some recognition and clout," said Kathie Hackler, vice president of Gartner Dataquest, a division of research firm Gartner. "SBC is not in the content business."
Separately SBC and Yahoo have been hoping to run profitable subscription services over high-speed Internet lines. The new deal could boost to both efforts, giving Yahoo access to Net infrastructure and a closer billing relationship with subscribers, and giving SBC a better content brand name.
Yahoo already offers a few paid services such as Web hosting and bill payment and is close to launching paid entertainment services such as the Pressplay music subscription plan.
For its part, SBC has been changing its high-speed DSL (digital subscriber line) infrastructure to help its own subscription plans. The company argues that it will have a leg up in a coming subscription world because its new infrastructure will allow it to guarantee speeds and bandwidth for services such as video-on-demand, music and gaming.
Previously the telecommunication giant gave few clues as to where its content would come from, although it indicated interest in co-branded subscription services with entertainment companies. Now Yahoo, which already has established relationships with movie studios and record labels, may help to jump-start SBC's efforts.
"Our agreement contemplates that Yahoo would be a partner in the development of those capabilities," SBC CEO Edward Whitacre said on a conference call Wednesday.
One big package
Beginning in 2002, the companies will offer consumers co-branded DSL and dial-up Internet access in SBC's 13-state service region. The co-branded service will come with a custom-designed Internet Explorer browser that will offer links to Web services provided by the companies.
Yahoo will also bundle some of its fee-based premium services with the offering, such as extra storage space for its e-mail and photo services, enhanced parental controls, and new Web camera features.
The portal will promote the service throughout its network of sites, and SBC will advertise it both on the Web and off. In addition, Yahoo will share advertising, e-commerce and premium services revenue with SBC.
The telecommunications company plans to use the new service as the default home page for its 3.6 million DSL and dial-up customers, said spokesman Bill Noble. SBC completed its acquisition of its dial-up provider, Prodigy, earlier this month.
Prodigy, one of the oldest brand names on the Net, will lose whatever heft it has left as a result. SBC hasn't decided whether it will phase out the Prodigy name altogether but says all Prodigy customers will be moved to the SBC-Yahoo co-branded service.
"We believe Yahoo is a much stronger brand," Whitacre said.
Although this is not the first time Yahoo has struck a partnership with an Internet service provider, the company now appears to be seeking stronger relationships. As AOL Time Warner and Microsoft consolidate their hold on consumers, Yahoo's power has been undermined by the steep drop in its advertising-based revenue stream.
"As access relationships become a more important part of our strategy, we could not ask for a more solid partner than SBC," Yahoo CEO Terry Semel said in a statement.
Previous relationships have not proved particularly successful. In January 1998, Yahoo and MCI said they would launch a co-branded ISP that would use the Web portal as its default home page. Later that year, Yahoo struck a similar agreement with AT&T's WorldNet ISP.
On the broadband side, Yahoo entered a deal in November 1999, to bundle its home page with Covad Communications' DSL services. Covad filed for bankruptcy in August.
On Tuesday, Covad said it received $150 million in loans and financing from SBC, though an SBC representative said the financing was not related to Wednesday's announcement.
Separately Wednesday, Sunnyvale, Calif.-based Yahoo appointed two new members to its board of directors, a move that comes a day before its conference with financial analysts.
Yahoo appointed Gary L. Wilson, chairman of the board for Northwest Airlines and former chief financial officer at Walt Disney, and supermarket baron Ron Burkle, founder of The Yucaipa Companies, which owns supermarket and retail chains Fred Meyer and Kroger.
Both executives are influential in the entertainment industry. Burkle has worked closely with Hollywood power broker Michael Ovitz on various Internet investments. The appointments are not surprising given Semel's prior job as co-CEO of Warner Bros. Yahoo now has 10 members on its board of directors.
News.com's Sam Ames contributed to this report.