Verizon and Comcast May Have Overpaid for Online Publishers: Here's Why Both Hope They Did

Over the past 10 years, perhaps the highest-growth industry has been online publishing. The growing ranks of think-pieces, data-driven articles, hot takes, and even click bait has grown on an amazing scale. And there's a reason for this amazing growth: advertising. According to research firm Magna Global, digital advertising will overtake television as the biggest media category for advertising, a proposition unthinkable just a decade ago. Simply put, it seems as if columnists are the new sitcom stars.

Big media has noticed: AOL, now a division of Verizon , purchased liberal blogging site Huffington Post in 2011 for a then eye-popping sum of $315 million. More recently, Comcast invested $200 million in both viral news site BuzzFeed at Vox Media at post-money valuations of $1.5 billion and $1 billion, respectively.

The reason for the tremendous increase in online publishing is the business model. For most sites, the content is provided free to consumer via a third-party payment arrangement. Essentially, advertisers are paying publishers for end-user consumption. Third-party payment arrangements are notoriously famous for negative externalities as end users and payment providers have differing requirements and expectations.

Perhaps the best example of the dislocations third-party payment systems encourage is higher-education and healthcare, which have both grown at rates much higher than the long-run inflation rate. For the online publishing industry, however, the growth bubble may come to a rapid deceleration if comScore 's newest data is correct.

Advertisers want millennials; millennials don't want ads

The biggest divergence between payers (advertisers) and end users in online publishing is the presence of advertising. comScore's newest data points out the potential headwinds with its newest report on mobile ad blockers -- 9% of U.S. users have mobile ad-blockers installed on their phones; in Germany, 24% of users block ads; and 27% of French users have the technology on their mobile devices. As more browsing shifts to mobile, these ad blockers will continue to hurt publishers.

Even worse for advertisers is the demographic skew of ad blockers. Versus 9% of the overall U.S. population, 15% of all millennials and 12% of all high-income users have ad blockers installed. Both trends are present in every country except for France, where all income levels had high levels of ad blockers.

This is a worrying trend, because both are very desirous demographics. Millennials have an entire lifetime to acquire products and many large purchases (home, autos, etc.) are yet to be made. High-income users are also desired as their ability and propensity to spend is higher. If advertisers cannot reach these users via mobile advertisement amid a shift to more mobile devices with ad-blocking technology, it stands to reason the shift in ad spend toward mobile outlets could quickly reverse.

Have large companies overpaid for these publishers? Maybe, but they may not care

Perhaps. Industry-specific pressure aside, many privately owned companies are now struggling to maintain their high valuations amid former unicorns (privately owned companies with $1 billion valuations) struggling in the public markets or amid concerns with their business models. Count GoPro and Fitbit amid the former; Theranos and Zenefits are among the latter.

The less sure venture capitalists are about exit prices, the higher rates of return they will require, leading to lower valuations. Recently, privately owned Spotify raised $500 million in the form of debt with a discount on its potential IPO. The deal was structured in a way to specifically avoid revaluing the company, avoiding a potential "down round" where the company reports a lower valuation than in a previous funding found. Add to this environment industry-specific headwinds, and it's possible for many private publishers to struggle to maintain valuations.

But here's the clincher: Comcast and Verizon probably don't care if they overpaid for these investments and may actually prefer if they did. For Comcast and Verizon, these small purchases were essentially diversification, hedging purchases to offset potential losses in its core businesses. In the end, Comcast would rather for advertising money to remain in the television ecosystem so it can benefit from its NBCUniversal property which includes channels like CNBC, USA, E!, and MSNBC.

Additionally, Verizon and Comcast are also in the cable delivery business which is negatively affected by decreasing advertising dollars. Many cable networks attempt to make up for lower-than expected ad rates by increasing the consumer costs for network channels (affiliate fees), pushing more users to cut the cord. Buying digital properties was a way to hedge against this scenario. In the event ad-blocking use explodes, it's possible for advertisers to shift back to television, benefiting these companies much-larger business lines.

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The article Verizon and Comcast May Have Overpaid for Online Publishers: Here's Why Both Hope They Did originally appeared on Fool.com.

Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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