One way to look at the divide between the old economy and the new economy is to compare companies: Gannett and Yahoo. Gannett, a diversified media concern, owns USA Today, a slew of local newspapers, and 22 television stations in mostly secondary and tertiary markets. Yahoo is an Internet portal through which nearly 200 million people around the world pass every month.
Two years ago, Yahoo's market capitalization was roughly five times that of Gannett. Today, Gannett's market capitalization is roughly twice that of Yahoo. Put another way, two years ago, Yahoo could have acquired Gannett with relative ease. Today, Gannett would be the more likely acquirer.
The question is: Why doesn't it? Gannett is a solid, well-managed company. It delivers a steady profit, operating its various properties at high margins — between 17% and 35% — while rigorously controlling costs. But its growth prospects are constrained by the nature of the businesses it's in. It still has to buy roll after roll of newsprint. It still has to run printing plants all around the country. It still has to operate huge fleets of trucks. And while many of its news properties run Web sites, Internet companies continue to attack its most important advertising revenue stream: classified advertising.
Yahoo offers enormous potential for growth. If an average of $100 could be extracted annually from each person who passes through the site on a monthly basis, then Yahoo would have $20 billion in revenue. If an average of $1,000 could be extracted from each person, then Yahoo would have $200 billion in revenue, which would make it perhaps the most valuable company on the planet. Cross Gannett's content with Yahoo's reach, and you would have a powerhouse combination.
If you assume that a capable broadband Internet highway system, fiber optic and wireless, will be up and running by 2010, right down to the last home on the last mile, then Yahoo may be the cheapest stock on the market right now. It's not often that 200 million customers can be purchased for around $40 a head.
Which raises the next question: Who will buy Yahoo? It probably won't be Gannett, which seems culturally incapable of thinking much beyond its own category. But there are a number of companies that, if they are not already thinking about buying Yahoo, should begin doing so immediately.
First among these is Microsoft. It might be said that a company that is just emerging from a brutal antitrust battle would be insane to tempt such a fate again. But that should not, in fact, be a major concern. For one thing, the Clinton Administration has been replaced by the Bush Administration, which is decidedly more sympathetic to Microsoft's worldview — or, more accurately, less sympathetic to the worldview of Microsoft's rivals. Second, AOL's acquisition of Time Warner has created a juggernaut that presently has no rival in the marketplace. A Microsoft-owned Yahoo would create that rival and thus would bring about a much more competitive environment. Third, and let's be honest here, MSN — the Microsoft Network — isn't working out. Not that it's bad; to the contrary, it's very good. But it's stuck in the single digits of millions of paying customers. Buying Yahoo would allow Microsoft content to reach a much, much larger customer base under the umbrella of a brand (Yahoo) that is beloved. With its $30-plus billion cash hoard, Microsoft could purchase Yahoo in cash.
Two other obvious buyers are Disney and Sony, both of which lack a strong Internet brand. As one of the world's leading content providers in the form of movies, television programming, news, and family entertainment, Disney would benefit from Yahoo's extraordinary reach. And as the world moves from 56K modem connections to much higher speeds, more and more of Disney's content could be "broadcast" from the Yahoo portal. And Sony, as one of the world's great device producers, as well as a content purveyor in the form of movies and music, would similarly benefit from Yahoo's global reach.
Another, perhaps less obvious, buyer is Morgan Stanley Dean Witter. Having acquired Dean Witter to reach a much wider audience, Morgan Stanley has committed itself strategically to the consumer market. It's a crowded marketplace, with companies like Charles Schwab and Fidelity owning big pieces of the action. In addition, companies like American Express, First USA, and MBNA are flooding the marketplace with credit cards, which in turn depresses the value of Morgan Stanley Dean Witter's Discover card. Yahoo has an enormous following among investors because of its superb financial content; buying it would immediately give Morgan Stanley Dean Witter an advantage over rivals such as Schwab or Fidelity, as well as offer an unprecedented distribution channel for the Discover card. Offer everyone an initial annual percentage rate of 0% and a fixed rate of 10% thereafter, make everything on the site cheaper if bought with a Discover card, and before long Morgan Stanley would be in the first tier of the credit-card business. Owning Yahoo would also make Morgan Stanley a much more influential opinion leader.
Yet another potential buyer would be one of the Big Three: the WPP Group, the Interpublic Group of Companies, or the Omnicom Group. WPP, Interpublic, and Omnicom are the largest advertising-and-marketing-services companies in the world. During the dotcom heyday, they saw their market caps skyrocket. Since the advertising recession began last January, all three have been struggling to recapture some of that old magic — and to cope with a fundamental problem.
As more and more clients become more and more sensitive to advertising-and-marketing costs, advertising-and-marketing companies have found it more and more difficult to raise prices. With revenue growth constrained by the new realities of the marketplace, the Big Three have been scanning the horizon for the next big growth opportunity. One scenario their consultants sketch out for them is the so-called entertainment strategy, which calls for a company like WPP to invest in creative talent and production companies. That's a risky business — as neophytes to Hollywood have learned the hard way. A more straightforward strategy would be to buy Yahoo and then leverage its reach within the existing Big Three client base.
Still other potential buyers include General Motors and Wal-Mart. General Motors is never going to make a better car than Toyota or Mercedes-Benz. But it can compete on the strength of its brand — and the addition of Yahoo would only add luster. Since GM is now basically a finance company that makes cars, the same logic that pertains to Morgan Stanley applies to GM. Yahoo would offer GM the opportunity to sell its GMAC financial services directly to a vast and actively engaged customer base. Wal-Mart would also gain by having Yahoo under its umbrella. In addition to the classic bricks-and-clicks play, Yahoo would enable Wal-Mart to get cheaper credit out to a wider audience. The cheaper the credit, the more money that people will spend at Wal-Mart.
So much of business is about timing. During the winter of 1999, Steve Case understood that his stock could never go on selling at 100 times earnings, so he used AOL's inflated currency to buy Time Warner. Jerry Yang sat on his inflated currency — Yahoo at one point was selling at well over 150 times earnings — and he saw the value of his company collapse. But it's still a great company. And someone's going to buy it for what will be remembered as a song. Let's see: Who will it be?
John Ellis (firstname.lastname@example.org) is a writer and consultant based in New York.