AT&T has decided to sell a 53% stake in its Yellow Pages unit to Cerberus Capital Management for $950 million.
Jennifer Fritzsche, an analyst with Wells Fargo, referred to the valuation as “sensible” at roughly 2.1 times an estimate for EBITDA, “given that the directory business is declining fairly quickly.”
Beyond “sensible”, AT&T may have well decided that they would incur undue risk of intervention from state and federal regulation authorities if they had pushed for a much higher valuation. I had earlier suggested it would be grossly irresponsible if AT&T overvalued their Yellow Pages, and, after Verizon’s divestment of Idearc/SuperMedia, I’m not sure another company could get away with an unreasonably high price tag.
Still, this sale and its somber valuation amount to a dinner of eating crow for AT&T executives who had poured investment dollars into their Yellow Pages business, particularly investing in aspects that were less likely to return profit compared with cost. It wasn’t that long ago that I had sharply criticized AT&T for purchasing YellowPages.com for $100 million, apparently mainly to obtain the vanity Yellow Pages domain name. That was followed in short order back in 2009 by their purchase of the YP.com domain name. As I had noted back then, it was a terrible investment because the entire concept of Yellow Pages has been eroding in brand value, and a good online business/presence doesn’t require a literal keyword phrase to be successful. It didn’t take AT&T too long after the purchases to decide that it was indeed time to step away from association with the “Yellow Pages” name, and they switched over to using YP.com.
If only they had spent the $103.85 million on cutting-edge research and development in order to evolve the product, instead of trying to take shortcuts into a successful online business model!
It was very easy to see before they purchased YellowPages.com and YP.com that those domains were insufficient in value compared to their prices, since searches for “yellow pages” were clearly moving into decline. All of the major YP companies have had severe struggles in the past five years as advertisers and users have migrated from their highly profitable print directory product over to many other online and mobile business information sources.
This isn’t to say that large Yellow Pages companies cannot have a future in the internet world. There continues to be some usage in print books, and there is still a considerable amount of cashflow going on in those companies. However, for any of them to have a longterm future, they need to have leadership that is devoted to longterm success rather than short term stock market reactions. They need to refine a business model that works in this post-print world, and they need to do some major capital investment in R&D.
Unfortunately, I foresee a few of these companies eventually getting gobbled-up by other companies, if not failing outright, because they are only focused upon shortterm, immediate-gratification business. There’s a lack of serious devotion on capital investment — costcutting on internet/mobile product development as well as on the legacy print side, lowered entry wages which do not attract the talented/creative people the companies need, and outsourcing to foreign companies under the mindset that good interactive development is a mere commodity which can be obtained anywhere.
If one takes a step back and maps the trends, it’s extremely easy to see where these behaviors are likely to lead. It’s patently ridiculous in most cases for a YP company to cut staff from their interactive sides while chopping costs from the legacy print side — when print will continue to erode and the only possible future is in developing something viable in the interactive side of the house!
Earlier, Google attracted sharp minds by providing challenging work, and offering competitive/attractive salaries and benefits — this is how to get some of the best and brightest working for you. It simply isn’t possible to attract the cream of the crop if you’re doing so on a shoestring.
And, the idea that outsourcing development of business directory applications to a foreign country — which may not even commonly have street addresses — is probably an exercise in futility.
So, for a number of the Yellow Pages companies, the current problem is insufficient capital investment in building innovative/competitive products — no one is standing back and trying to build a strategy for a realistic future.
AT&T’s dimming star as a Yellow Pages company wasn’t so much a failure due to a lack of investment as a similar failure of leadership vision — there was some sort of awakening at some point that online was important, and they threw tons of money at it, but they threw the money in the wrong direction. Perhaps it was some sort of entrenched, Business 1.0 worldview of buying success outright. However, this is the Business 2.0 world, and old Wall Street models don’t seem to work entirely the same way any more — there needs to be a really clear vision and drive towards a competitive future along with capitalization to make it happen.