Whom Will AT&T Favor?

I am, frankly, amazed that no one has pointed out who is most likely to benefit first as AT&T dumps the neutral Internet for one in which its partners get favored treatment.

Yahoo.

AT&T has had marketing agreements with Yahoo for years. As SBC, as Ameritech, its DSL broadband offering was always marketed with Yahoo. BellSouth reached an identical agreement with Yahoo last year.

When you use AT&T Yahoo as your ISP, Yahoo is your start page. Yahoo’s registration is sitting in front of you every time you turn your machine on. It’s obviously a good deal for Yahoo, because Yahoo keeps renewing it. It’s a good deal for AT&T, too, because AT&T knows nothing about producing Internet content or applications.

So it doesn’t take a rocket scientist to figure out what happens when Cisco boxes at AT&T POPs wake up and decide to start implementing a two-tier Internet.

Suddenly every Yahoo page pops up immediately, while Google page and MSN pages take time to load. (Many MSN pages are already bandwidth hogs — MSNBC for instance.) You add quicker access to the front-of-the-brain advantage of a forced home page, and you’re talking about some serious market share.

That’s why the TV networks’ recent moves against Yahoo — putting their content on their own portals — is so important. The networks at this point are willing to even disintermediate their own affiliates in order to make sure their Must See TV stays in their control, and doesn’t desert to, say, Yahoo.

My guess is, however, that they are too late.

There is another reason to favor Yahoo while allowing this competition to go forward, however.

Just look at Yahoo’s market cap, about $44 billion.

AT&T’s market cap is "just" $99 billion,  but add BellSouth to that that and you’re talking about $160 billion. Add in a good quarter or two from cutting headcount, a little profit momentum, and suddenly Yahoo becomes digestible. Especially if the networks are, in the short run, knocking Yahoo about in the video business.

Now, with Yahoo part of AT&T, and with network neutrality dead, the networks have to treat with AT&T. It’s now the main way for them to reach their viewers.

That’s the thinking, I think. It’s brain dead thinking. It’s a long shot. It’s terribly destructive to U.S. competitiveness. But that’s the game they’re playing.