Verizon Is Said to Be on the Hook for Mayer's Yahoo Search Deal

(Bloomberg) -- Verizon Communications Inc. paid $4.5 billion for Yahoo! Inc.’s web businesses. Then it took a $500 million hit for post-acquisition costs. It’s poised to pay up again, thanks to a high-profile deal struck by Marissa Mayer when she ran the internet company.

Executives at the telecom giant are negotiating a bill they will likely owe Mozilla Corp., owner of the Firefox browser, after an expensive web search deal fell apart. Verizon could end up paying hundreds of millions of dollars, depending on how the agreement is interpreted, according to people familiar with the deal and online chat logs shared with Bloomberg. The bill could also come in lower, the people said.

Last week, Mozilla said its latest Firefox browser will rely on Google’s search engine as the default in the U.S. and three other countries. That broke a five-year contract Mozilla signed with Yahoo in 2014. 

For search engines, like Yahoo and Alphabet Inc.’s Google, default placement in a browser provides a reliable pipeline of queries and ad revenue. Yahoo agreed to pay Mozilla about $375 million a year for five years for those rights in 2014. That contract had a clause, agreed to by Mayer, that let Mozilla walk away and still get paid if Yahoo was acquired and Mozilla could show the change of control damaged its brand and search experience, according to a person familiar with the situation. Verizon bought Yahoo earlier this year, bringing this part of the agreement into play.

After Mozilla replaced Yahoo with Google last week, a spokesman for Verizon’s new advertising division Oath said the company was "surprised" by Mozilla’s decision and was "in discussions" about the agreement. The two companies are hashing out terms of the deal, according to recent messages from former Mozilla executives on an alumni chat group that were shared with Bloomberg.

"Verizon is still negotiating getting out of the deal, and hasn’t yet," one of the former Mozilla executives wrote to the group last week. "There are substantial costs to them no matter what."

It’s likely Mozilla is still getting paid by Verizon while proceeding with an expanded partnership with Google, "and will be getting some revenue overlap," the former executive added. "I’m basing this on conversations with senior leaders in the last month. Not on speculation." Bloomberg contacted the former Mozilla executive, who declined to comment further.

For Verizon, the talks will center on how big those costs are. It could hit $750 million, in theory, if Verizon is on the hook for the remaining two years of the Yahoo deal. The telecom company may have to pay a lot less though, based on another aspect of Mayer’s deal that was reported by The New York Times in 2016. That publication described another clause: If Mozilla got a new search deal, Yahoo would have to cover the difference between what it paid Mozilla and what its new partner doled out. For example, if the new contract was worth, say, $275 million a year, then Yahoo would have to pay $100 million a year.

"We exercised our contractual right to terminate our agreement with Yahoo! based on a number of factors including doing what’s best for our brand, our effort to provide quality web search, and the broader content experience for our users," Denelle Dixon, Mozilla’s chief business and legal officer, said in a statement. "We are confident in the future of Mozilla and have structured our commercial relationships to position us for continued growth and success."

Mayer didn’t respond to a request for comment, and Google declined to say how much it’s paying Mozilla for the new deal announced earlier in November. Verizon’s Oath didn’t respond to requests for more details beyond its statement last week.

In 2014, Mayer won Mozilla over, in part, with an offer to pay about $100 million more than Mozilla got from its previous deal with Google. Part of Mozilla’s openness to the deal came after Google spurned it, according to a former Mozilla executive. Mozilla’s share of the browser market had started to slip and Google used that as leverage. That year, when Mozilla and Google were renegotiating their contract, the search giant proposed halving its annual fee, this person said. The former executive asked not to be identified discussing private matters.

Given Firefox’s small share of the U.S. browser market, it’s unlikely that Google is paying as much as $375 million a year.

"It’s largely a given that a Google deal would not bring as much revenue compared to the Yahoo deal," another former Mozilla executive wrote last week on the group chat viewed by Bloomberg. "It is also safe to assume that this is a negotiated back out with Yahoo/Verizon, where the latter conceivably might still pay a chunk or two to Mozilla."

--With assistance from Scott Moritz

To contact the reporter on this story: Mark Bergen in San Francisco at mbergen10@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Alistair Barr, Molly Schuetz

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