Thursday, July 30, 2015

Could Facebook, Comcast deals push Google to buy Verizon?

And better compete with Comcast-TimeWarner?

Could Facebook, Comcast deals push Google to buy Verizon?

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UPDATE: Todd Juenger, analyst at Bernstein Research in New York, on March 7 published a report laying out possible consolidation by the remaining cable and TV network companies Comcast-Time Warner tie up. I asked him about the potential for a Google-Verizon deal as noted below. Juenger says: "Hey, any combo could be argued." But Google buying Verizon (or AT&T, for that matter) "would really slow down Google's overall growth rate -- not sure many investors would be happy with that." Plus it would saddle google with "the legacy landline businesses, and pension obligations, etc." Still, Google would indeed collect a big fiber network, "instead of building out the new ones city by city." Worth the deal expense? You'd have to analyze the network costs, he said, and figure out how Google owning all that fiber would affect Google's Android wireless business: "Lots to think about."

EARLIER: The week after Comcast Corp. agreed to pay $41 billion for Time Warner Cable and its 11 million paying customers, 50,000 workers, $22 billion in yearly sales and $8 billion in profits pre-tax/interest/depreciation, Facebook pledged to spend almost half as much -- up to $19 billion in stock -- for WhatsApp, a less-than-100-person  Silicon Valley start-up that's given away hundreds of millions of free smartphone-messaging apps, mostly in Asia and Europe, while living off its investors' capital.

"It's easy to say that Facebook severely overpaid," but among high-priced Internet giants such risky-looking deals have an attractive logic, writes James M. Meyer, boss at $1 billion-asset, Conshohocken-based Tower Bridge Advisors, in a report to clients of brokerage Boenning & Scattergood. 

Popular apps have this in common with cable-TV boxes: They help consumers make sense of the confused menu of communications and video services that have flooded our world; and the companies that own them have the massive assets needed to buy and control the content and services that consumers demand, enabling them to eventually extract fees and high profits from users and advertisers. 

Facebook hopes WhatsApp will make it "dominant" in messaging, like Facebook's previously-acquired Instagram in online photos, and Google's YouTube to videos, Meyer adds: "If Facebook isn't a dominant messaging player in two years, the deal is a disaster" and will rank with the wild failed acquisitions that "wasted" Hewlett-Packard, Yahoo and AOL.

When you're as big as Google (or, say, Comcast),  "size becomes the moat" that keeps competition away. And when you're as high-priced relative to your profits as Facebook or electric carmaker Tesla, which is worth more than real automakers many times its size, you have to "keep hitting home runs" or your share price crashes, he added.

Indeed, for Facebook, buying WhatsApp is a defensive move, writes Jack Kent, London-based mobile analyst for IHS Technology of Lexington, Mass. and Philadelphia. "Facebook could not risk WhatsApp's 450 million monthly and 315 milllion daily active users falling into the hands of a competitor, such as Google."

Even if Facebook manages to charge WhatsApp customers a buck a year for the service, the purchase price doesn't nearly justify itself. The real attraction is WhatsApp's verifiable smartphone directory -- "a vast database of consumers' mobile phone numbers," for young people who mostly don't even own old-fashioned landline phones, argues Eleni Marouli, Kent's colleague at IHS, in a separate report.   

Facebook is paying $36 per WhatsApp user -- which sounds like a lot, for a free service -- but is actually "remarkably similar to the $33 per user they paid for Instagram," notes Jordan E. Rohan, New York-based telecom analyst at Stifel & Co. While the total price "seems high," WhatsApp has "muted" the risk of social-media and communications competition from Google. Facebook shares would have fallen more than 10 percent, Rohan argues, "if Google had purchased WhatsApp instead."

Where does that leave Google? In a good position to buy Verizon -- a deal that's been speculated over since the late 2000s, Steve Donohue, editor of the FierceCable newsletter, told readers in a note last week. Verizon was worth more than $130 billion last week -- any deal would likely add a premium. But look at where Google has been adding high-speed fiber-based Internet, including its expansion announcement last week: in Southern and Western cities where Verizon's FiOS fiber service has no presence but Comcast (and Time Warner) often do.

A wired-and-wireless Google-Verizon network, combined with both companies' interest in "telehealth," video and home-automation services, holds out the promise of a price-competitive rival to Comcast-Time Warner -- at a time when Washington regulators and Comcast critics like Harvard professor Susan Crawford are warning that U.S. internet speeds are behind those in more advanced Asian countries like Japan and South Korea or European countries like the Netherlands -- and more expensive than Internet almost everywhere else.

Could a Google-Verizon vs Comcast-Time Warner vs Facebook-etc. market really improve Americans' Internet and video access?

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About this blog

PhillyDeals posts drafts, transcripts and updates of Joseph N. DiStefano's columns and stories about Philly-area business, which he's been writing since 1989.

DiStefano studied economics, history and a little engineering at Penn and taught writing at St. Joseph's. He has written thousands of columns and articles for the Inquirer, Bloomberg and other media, wrote the book Comcasted, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com, distefano251@gmail.com, 215.854.5194 or 302.652.2004.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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