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AT&T rumors sink Yahoo shares

Yahoo Inc's recently resurgent stock retreated by more than 5 percent on Friday amid fears that a setback in a lucrative partnership with AT&T Inc will undercut the anticipated gains from an overhaul of the Web portal's advertising platform.

The sell-off was triggered by an unconfirmed report in the Wall Street Journal that AT&T wants to stop giving Yahoo a slice of the subscriber fees from a six-year-old co-branding agreement to sell Internet access in most of the country.

If AT&T gets its way, Yahoo would have to be satisfied with whatever money it could make by selling its own online products, such as digital music or matchmaking services, to subscribers of the joint service.

In a statement issued late on Friday, AT&T and Yahoo said they were constantly examining ways to adapt to changing market conditions. Neither company addressed the substance of the Journal's report, which the statement described as "speculation."

"As we continue our conversations, we have a common goal to increase the economic benefits for both parties," Yahoo chairman Terry Semel said.

By the time Semel spoke, investors had already drawn their own negative conclusions. Yahoo shares dropped US$1.59, or 5.2 percent, to close at US$29.12 on the NASDAQ Stock Market.

Before Friday's downturn, Yahoo's stock had climbed by 20 percent this year, rebounding from a horrible performance last year. That reflected Wall Street's widespread belief that Yahoo will prosper from a month-old upgrade to its formula for linking ads to search requests.

But a reshuffling of the AT&T deal would deliver a substantial blow.

Under the current terms of the contract, AT&T is believed to pay Yahoo US$200 million to US$250 million annually, accounting for more than 25 percent of the US$798 million in total fees that the Internet powerhouse collected last year.

Most of Yahoo's revenue -- which totaled US$6.4 billion last year -- comes from advertising.

Compounding the pain, Yahoo's profit margins on the AT&T partnership are much higher than on many of its other services because the telecommunications carrier handles most of the heavy lifting.

Standard & Poor's analyst Scott Kessler estimated the AT&T deal generated somewhere between US$30 million to US$70 million, or US$0.02 to US$0.05 per share, of Yahoo's profit for last year of US$751 million.

Analysts expect Yahoo to earn nearly US$780 million, or US$0.54 per share, this year.

The damage to Yahoo could be worse if its other major Internet access partners -- Verizon Communications Inc, BT Group PLC and Rogers Communications Inc -- follow AT&T's lead when they renegotiate their contracts.

Yahoo hasn't publicly disclosed the length of the contracts with its Internet access partners, but the AT&T alliance reportedly expires in April next year.

Friday's news woke up many investors who thought Yahoo had turned the corner after slowing revenue growth and competitive challenges posed by increasingly popular Internet hangouts like MySpace.com contributed to last year's 35 percent decline in Yahoo's stock price.

An improved advertising system known as "Panama" -- unveiled on Feb. 5 after a three-month delay -- has become the foundation for Yahoo's turnaround hopes. The upgrade is supposed to begin boosting Yahoo's profit in the second half of this year -- a prospect that now looks shakier, Kessler said.

"A lot of people have gotten scared again and are starting to realize that they have been pinning their hopes on the promise of something that is still uncertain," he said.
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