Why Yahoo’s foray into original TV series failed

Yahoo has flunked out of Greendale Community College. Its failure to forge a business from the revival of Dan Harmon’s cult comedy “Community” and two other scripted series is emblematic of the once-mighty Internet company’s muddled biz strategy overall.

The botched run at programming at primetime-level costs, which was supposed to draw on marketers’ TV budgets to reach Yahoo’s billion-user global base, is another black eye for CEO Marissa Mayer. While investors aren’t clamoring for her head yet, the clock is ticking for Yahoo to prove its ability to grow profitably.

Mayer and chief marketing officer Kathy Savitt — the lieutenant who oversaw Yahoo’s content efforts until quitting last month to join independent studio STX Entertainment — had ballyhooed “Community” as anchoring a bold new premium-content strategy to round out its live and short-form video pillars.

But viewers, and the ad bucks to support the shows, weren’t materializing at the pace Yahoo had hoped, especially considering the seven-year horizon laid out to recoup the cost of the productions. On its third-quarter earnings call last week, the company revealed that it took a $42 million write-down on “Community,” basketball comedy “Sin City Saints” and “Other Space,” a sci-fi spoof from Paul Feig.

“We thought long and hard about it, and what we concluded is … we couldn’t see a way to make money over time,” chief financial officer Ken Goldman told analysts concerning the three series.

With Yahoo’s change in strategy, it has dropped plans for twentysomething comedy “The Pursuit,” from exec producers Scott Stuber and Dylan Clark, and director-exec producer Beth McCarthy Miller.

Yahoo isn’t officially calling it quits on big-budget originals. But “we are taking a pause on long-form scripted content,” said Lisa Utzschneider, Yahoo’s chief revenue officer, adding that the company has no plans to order additional content for “Community,” produced by Sony Pictures TV.

Yahoo didn’t spend much to market the shows, largely counting on “Community” fans to rally after NBC axed the sitcom. Meanwhile, Yahoo fronted a relatively small lineup amid an intensely crowded market for high-caliber TV content, and it simply doesn’t have a brand people associate with lean-back entertainment. “TV is not their core competency,” said John Blackledge, senior Internet analyst at Cowen & Co. “They don’t have the budget to go after the best content against Netflix, Amazon, Hulu or the networks.”

Ultimately, Yahoo didn’t have the time — or the willingness to make long-term investments — reach the scale to make ad-supported TV shows work, lacking subscription revenue or pay-TV fees the traditional ecosystem relies on. The dilemma is that if Yahoo had acquired additional shows, the endeavor might have been an even costlier debacle.

“On the one hand, Yahoo’s been the only digital-first media company to meaningfully pursue television (advertising) dollars,” said Brian Wieser, senior analyst at Pivotal Research Group. “But the reason nobody else has done it is because the economics are terrible.”

If Yahoo’s entertainment woes invoke a sense of deja vu, that’s because this isn’t its first failure in that arena; when former Warner Bros. CEO Terry Semel ran the company 10 years ago, ambitions to be more like TV were similarly thwarted.

And Yahoo appears to have had another money-losing fumble on its hands with the free livestream of the NFL’s Oct. 25 Bills-Jaguars game from London. Yahoo reportedly paid the NFL at least $15 million for streaming rights, and the companies claim to have garnered 15.2 million unique viewers worldwide.

But exactly how long those users watched the game on average was unclear, given that Yahoo auto-played the livestream on several destinations. Factoring in production and streaming costs, “There was no way for them to make back” the investment, said streaming-industry expert Dan Rayburn.

The $42 million charge for the three shows contributed to another disappointing quarter for Yahoo. It reported Q3 revenue of $1.23 billion and adjusted earnings per share of 15¢, vs. Wall Street expectations of $1.26 billion in sales and EPS of 17¢.

Worse, the company cut its fourth-quarter revenue forecast to between $1.16 billion and $1.2 billion, compared with average analyst expectations of $1.33 billion.

“The core business is decaying faster than they think,” Blackledge said.

The poor results and outlook led Mayer to promise that the company will focus on fewer products in 2016. Compounding her headaches, Yahoo has seen several recent high-level exec departures. In addition to Savitt’s exit, last week Jackie Reses, formerly Yahoo’s chief development officer, left to run the business-financing group of Jack Dorsey’s Square, while product senior VP Mike Kerns joined Chernin Group.

The departure of Savitt may have helped prompt Mayer, in triage mode with Yahoo’s larger financial woes and still struggling to prove the value of its $1.1 billion acquisition of Tumblr, to pull the plug on the scripted-originals strategy. Yahoo now has put Martha Nelson, previously a longtime Time Inc. senior editorial executive, in charge of its overall media strategy, including video.

There’s urgency for Mayer to demonstrate a clear and credible path forward. Yahoo’s spinoff of the remaining 15% stake it owns in Chinese e-commerce giant Alibaba Group, previously expected to close in Q4, may be delayed until January.

Once that happens, investors will fully focus on Yahoo’s business metrics, and the strategy (or lack thereof) to fix them.

It’s unclear just how the fast-growing digital video space will figure in to Yahoo’s business going forward. “We’ll continue to invest in short-form video content, which is strategic for us,” Utzschneider said. Yahoo earlier had hinted it might pick up another season of “Community”; sources said Sony TV still has a film adaptation in play.

“They were sort of dabbling in long-form originals,” said VideoNuze analyst Will Richmond of Yahoo. “They’re dabbling in news with Katie Couric, and dabbling in sports with the NFL game. But it’s hard to do any one of those things well unless you’re all-in.”