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Why Verizon is betting big on Yahoo's online news

For Yahoo, its sale marked "an ignominious end" for a onetime internet pioneer that still has about one billion monthly users, RBC Capital Markets analyst Mark Mahaney said.

For Yahoo, its sale marked "an ignominious end" for a onetime internet pioneer that still has about one billion monthly users, RBC Capital Markets analyst Mark Mahaney said.

But for Verizon, its $4.83 billion purchase of Yahoo boosts Verizon's ownership of news and entertainment content that it can market to its wireless or FiOS subscribers, observers said.

Verizon also can leverage its massive size - the company bought another fallen star, AOL Inc., in 2015 for $4.4 billion - to boost Yahoo's share of the digital-ad business, now a distant third to Google and Facebook.

"To live off organic growth at Yahoo would not make sense," said Larry Chiagouris, marketing professor at Pace University's Lubin School of Business in New York.

"In some ways, [Verizon] had to do this. The next big step is for them to purchase a movie studio," he said, noting that Paramount Pictures is reportedly for sale.

For years, big pay-TV companies have sought exclusive content as marketing advantages. DirecTV - now part of AT&T - has heavily marketed its "Sunday Ticket" of out-of-market NFL games to subscribers.

The Comcast Corp.'s $30 billion deal for NBCUniversal in 2011 was partly viewed by opponents as a bid for exclusive content for its TV service.

The Federal Communications Commission, in response, placed merger terms on the deal, saying that Comcast had to make NBCUniversal available to online and pay-TV competitors until January 2018.

Comcast also recently bought DreamWorks Animation SKG movie studio for $3.8 billion, without federal restrictions.

Chiagouris said he believed that Yahoo's online services - Yahoo Mail, Tumblr, Flickr, Yahoo Finance, and Yahoo Sports - would remain free for web browsers as Verizon creates exclusive content through AOL and Yahoo.

The online businesses will still be a small part of the telecommunications giant. AOL and go90, the video-streaming service aimed at teens, account for about 3 percent of Verizon's revenue. Adding Yahoo, it doubles to about 6 percent, according to John Hodulik, an analyst at UBS Securities L.L.C.

AOL head Tim Armstrong, who will likely lead the combined Yahoo/AOL entity for Verizon, told Bloomberg News that "this is a very big milestone for us in the path forward, but we also have bigger 2020 goals, so you'll see us be aggressive."

"Yahoo Finance is No. 1 in its category," Armstrong said. "I don't see why we wouldn't leverage Yahoo Finance across AOL and on your Verizon phone. I think consumers would love it."

"We will be running a house of brands structure with multiple strong brands," he added. "We think it is a strategic differentiation for us to have a significant set of brands with passionate users. If you are a Yahoo Mail user, you will see a lot more Yahoo, not a lot less Yahoo in the future."

Lowell McAdam, Verizon's chief executive officer, is expected to talk about the Yahoo deal and its ramifications on a conference call with Wall Street analysts on Tuesday morning.

Verizon, based in Basking Ridge, N.J., has been selling off its legacy phone lines as it concentrates on its wireless business. The last of Verizon-owned phone lines are located in the Northeast.

John Colley, the associate dean at the Warwick Business School in Britain who follows megamergers in the U.S. and Europe, didn't think the Yahoo deal seemed to be a wise one for an online network operator and phone company such as Verizon.

Technology companies can be exceedingly hard to acquire and merge into larger companies because of egos and personnel. "It's just a big bet and hoping that something comes out of it," he said of Verizon's Yahoo deal.

Verizon shares fell 23 cents to $55.87 on Monday. Yahoo shares slumped $1.06 to $38.32 on hopes of a higher price for the internet assets. Yahoo will retain stakes in Chinese online retailer Alibaba and Yahoo! Japan.

Said Chiagouris, "Big mergers throw big companies into bureaucratic infighting and uncertainty."

bfernandez@phillynews.com 215-854-5897 @bobfernandez1