Why YHOO is Tempted by the Risky World of Original Content

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There is an old joke about one of the many grooms of Elizabeth Taylor, the often-married movie star who died in 2011, who worried before his honeymoon about how to make things “interesting.”

yahoo-yhoo-stock-logo-185Though it may be a stretch, it sums up the situation facing Yahoo! Inc. (YHOO) when it comes to original scripted video content.

The Sunnyvale, Calif.-based company recently announced plans to pick up the critically acclaimed cult sitcom Community, recently canceled by Comcast Corporation’s (CMCSA) NBC television network.

Unfortunately, YHOO’s announcement got overshadowed by even bigger news that Amazon.com, Inc. (AMZN) had signed a deal with legendary director Woody Allen to direct his first television series. That news came on the heels of the Seattle-based company winning a Golden Globe for its comedy-drama series Transparent.

Let’s not forget Netflix, Inc. (NFLX) as it releases a new season of House of Cards, its critically acclaimed political thriller, and the problem becomes clear: there are lots of great shows to watch.

Like the hapless groom in my tortured metaphor, content companies are finding it increasingly difficult to attract viewers. There are serious financial ramifications for YHOO.

For one thing, there is a glut of video advertising inventory and thanks to the proliferation of automated auctions it’s never been cheaper. Though exact costs for Community weren’t available, the show probably cost a pretty penny. The cast is used to getting network-sized paychecks and may not be willing to take huge cuts in pay to keep the show going.

Orange is the New Black, for instance, reportedly costs Netflix $3.8 million an episode to produce. Keep in mind that figure came from the first two seasons when the largely unknown cast was building an audience for the dark prison comedy.

The cast, if they follow the Hollywood script in this situation, is probably going to demand more money.

Yahoo also is reportedly paying broadcaster Katie Couric to front its budding Yahoo News operation. Should her efforts prove more successful than her tenure at CBS Evening News,  she will demand more money as well.

Flush with about $12 billion in cash from the Alibaba Group Holding Ltd (BABA) IPO, YHOO is under pressure from Wall Street to do something — anything – with that windfall. Though it can write plenty of checks to content creators, investors need to be assured that Yahoo isn’t throwing good money after bad, a concern that’s not easy to address.

Netflix reportedly spent about $3 billion on TV and film content in 2014 and expects that cost to surge to $6 billion over the next three years as international rights become increasingly expensive. This strategy is extraordinarily risky because neither Yahoo nor any other content company can guarantee a hit.

Indeed, betting on scripted video programming is a dicey during the best of times and a gargantuan waste of money during the worst. For every Orange is a New Black there is Bojack Horseman, a dark animated comedy about a washed-up sitcom star who happens to be a horse. The Netflix series has attracted little notice, although it’s worth checking out.

Even the hysterically funny Bill Maher couldn’t generate much buzz for Amazon Fishbowl with Bill Maher, a talk show he hosted on the e-commerce giant’s site in 2006. A critical favorite can take an unexpected turn, as was the case with Arrested Development, which was widely panned by fans and critics when it was reborn on Netflix. Entertainment Weekly called it a “huge mistake.”

However, it was risk Netflix was prepared to make and one that YHOO must take. Without a significant portfolio of original, high-quality content, YHOO risks becoming irrelevant. Indeed,  it’s important to remember that YHOO came of age when portals such as YHOO,  AOL, Inc. (AOL)  and Microsoft Corporation’s (MSFT) MSN sought to be all things to all people.

Even with misgivings about Internet advertising and YHOO in particular,  I think the time is right to buy YHOO.  Indeed, YHOO stock looking pretty attractive. It trades at a reasonable price-to-earnings multiple of 6.2 and if the video strategy takes off, YHOO may be more amenable to a merger with among others.

The stock also benefits from extraordinarily low expectations. Many on Wall Street have noted that the 16 percent gain in YHOO stock over the past year was the result over the excitement over the Alibaba windfall rather than any turnaround in the company’s core business.

CEO Marissa Mayer is in a lose-lose situation. If she didn’t go the original content route,  her critics in Wall Street would argue that the company is losing its competitive edge. Becoming a hub of original content won’t satisfy her critics who are wondering if YHOO will ever become a growth stock again.

YHOO is trading about 10 percent under its average 52-week price target of $51.15.  If YHOO can move the needle a tiny bit on original content, that forecast may prove to be optimistic.

As of this writing, Jonathan Berr does not own shares in any of the aforementioned stocks.

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Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/yhoo-tempted-risky-world-original-content/.

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