AT&T (NYSE: T) 
wants to renegotiate a long-standing partnership with Yahoo (Nasdaq: YHOO) , apparently seeking a scaled-down deal to gain greater control over the content delivered to its broadband customers. The move could cost Yahoo nearly a quarter billion dollars in annual revenue.
The deal, which Yahoo signed in 2001 with SBC Communications -- now AT&T -- is believed to be worth an estimated US$200 million to $250 million a year to the Web portal, or close to 5 percent of its total revenue.
The current contract is in place for more than a year longer. However, both firms have been in talks to extend the partnership beyond the current April 2008 expiration date. The giant telecom and Yahoo have offered cobranded Internet services to consumers and businesses.
After the news of the current talks was reported Friday in The Wall Street Journal, investors responded by selling off Yahoo stock. In midday trading, shares of Yahoo were down more than 5 percent to $29.08.
Big Blow or Natural Evolution?
Though specific financial terms of the cobranding partnership have not been released, analysts estimate that AT&T is paying Yahoo around $3 per subscriber. Subscribers got a customized Yahoo home page and access to a number of Yahoo services.The 2001 AT&T-Yahoo deal was important at the time because cable broadband access had gained an early lead and phone companies such as AT&T were eager to draw attention to their DSL (digital subscriber line) offering as an alternative.
Since then, the Internet landscape has altered dramatically, with many Web firms now willing to pay broadband providers for access to their customers and to share booming advertising revenues.
AT&T has grown quite a bit through acquisition and now may feel it has sufficient scale to go it alone in the Internet access arena, with some 12 million broadband subscribers nationwide.
It's unlikely AT&T would extend the deal at anything near the previous terms, which will put a dent in Yahoo's revenue.
"Yahoo is likely in jeopardy of losing its AT&T deal, or at least a reworking of the deal that could materially scale back the relationship," analyst Scott Devitt of Stifel Nicolaus wrote in a research note.
If not for "fear of disrupting customer bases," AT&T and other DSL companies might shelve older partnerships and avail themselves of more lucrative partnerships with Google (Nasdaq: GOOG) and others who
may be willing to pay for premium access to high-speed customers, Devitt said.
He cited recent deals in which Google and others paid to land premium space on PC desktops as an example of the changing economic landscape.
Replacement Players
The impact could be even greater on Yahoo's bottom line, as the AT&T partnership revenue is likely "at least as profitable as the rest of Yahoo's business," since AT&T was helping to fund the marketing and customer service aspects, former Merrill Lynch (NYSE: MER) analyst Henry Blodget said.
Perhaps Yahoo would replace any lost revenue with new gains from its Panama advertising delivery system, which went live in the U.S. last month and is seen as helping Yahoo to boost both revenue and profits in its online search business.
However, with 150 million monthly visitors to its Web empire, Yahoo won't suffer too much should some of AT&T's 12 million users go elsewhere, JupiterResearch Analyst David Card told the E-Commerce Times.
"I suspect Yahoo's hold on AT&T users is pretty tight anyway," Card said, suggesting many will continue to use Yahoo search, e-mail and other services anyway.
In addition, the hoped-for upside from AT&T users buying more premium paid services hasn't necessarily materialized, he added.
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