A Hybrid Internet Strategy for ABC and Yahoo!

The expanded collaboration between ABC News and Yahoo! (NAS: YHOO) is a strategically sound attempt to graft a piece of dot-com rootstock onto an heirloom broadcaster. While this hybrid is likely to strengthen both companies at the operational level, it isn't likely to bear fruit for investors anytime soon.

Yahoo! and ABC News are both in need of audience growth, which is key to their financial viability. Yahoo!'s loss of market share over the last few years has gone hand in hand with falling margins and a declining stock price.

Yahoo! remained the No. 1 news site in August, but not by much, according to comScore. Yahoo! had 81.2 million unique monthly visitors in August, compared with 75.3 million for No. 2 CNN. Yahoo!'s lead has dwindled sharply since August 2010, when its audience was 90.4 million, compared with 65.6 million for CNN.

Yahoo! simply must retain its top spot in the online news market in order to maintain its value to advertisers, who have plenty of alternatives. Yahoo!'s gross margins already have fallen to 58.5% last year, from 82.9% in 2002, a reflection of its declining market share. Yahoo!'s share price has dropped to $15.66, less than half of its value at its peak in 2007.

The collaboration will provide Yahoo! with fresh, high-profile content that distinguishes it from the robot-driven news reports of Google (NAS: GOOG) and allows it to compete more effectively with rivals such as Time Warner's (NYS: TWX) CNN unit, AOL (NYS: AOL) , CBS (NYS: CBS) , and the msnbc.com partnership between NBC Universal and Microsoft (NAS: MSFT) . That should help stabilize market share, and, one can hope, provide some ballast for margins and the stock price.

The challenges for the online operations at ABC News are the mirror image of those at Yahoo! Yahoo! has scale, but it's in decline. ABC News is growing online, but lacks scale. ABC should benefit from preferential treatment on the Yahoo! network and better access to Yahoo!'s news audience, which is still the largest in the business. Together, they expect to gain a commanding lead of 100 million unique monthly users. For ABC News, that's instant scale, a powerful selling point in the war for advertising dollars.

ABC News will get a few bonuses in the deal that it probably couldn't get anywhere else. The deal will help ABC boost the value of its online advertising, by taking advantage of Yahoo! technology that customizes content for users and targets ads to them. Yahoo! also has proprietary technology for publishing news on the iPad and other tablets. Taken together, such technology helps Yahoo! generate an estimated $8 in revenue per user, which is twice as high as Facebook. ABC News should benefit from it as well. "There is a very powerful technology piece in this deal with Yahoo!," Joe Ruffolo, senior vice president at ABC News Digital, told me in an interview.

Even if the deal helps ABC News and Yahoo! at the operational level, it will be some time before those benefits will materialize for investors. Yahoo!, the subject of constant M&A rumors, already is pretty much fully valued at about 18 times earnings. For investors who already are inclined to own Yahoo! on the expectation of a takeover -- or a breakup that unlocks the value of its 40% stake in Alibaba -- this deal is one more reason to own the company. For other investors, you may find it best to wait for some evidence that the operational benefits are kicking in.

ABC is owned by Disney (NYS: DIS) , and this deal simply isn't big enough to move the dial for that stock.

All in all, this hybrid strain of news organization shows some promise. But as far as investors are concerned, harvest time is still next season.

Keep track of green shoots in new and old media by planting the stocks above in your free Fool watchlist:

At the time thisarticle was published The Motley Fool owns shares of Yahoo!, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Yahoo!, Microsoft, Walt Disney, and Google, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days.Fool contributor SteveRosenbush holds no financial position in any of the companies mentioned in this story. The Internets thing? It's news to him. We Fools don't all hold the same opinions, but we all believe that consideringadiverserangeofinsights makes us better investors. The Motley Fool has a disclosurepolicy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.