Yahoo! Loses Power Play

Investors have been buzzing about speculation that AT&T (T) is bailing on its partnership with Yahoo!(YHOO), but the truth is harder to discern.

On Friday, The Wall Street Journal reported that AT&T was considering scaling back the alliance with Yahoo!, which is set to expire in April 2008. The deal, which was signed in 2001, provides Yahoo! with a percentage of the revenue from DSL subscriptions, and losing it could cost the company $200 million to $250 million in revenue.

But later Friday, Yahoo! announced that the Journal's story was based on "rumor and speculation," saying "AT&T and Yahoo!'s ongoing partnership is rooted in the open and ongoing dialog we maintain about future opportunities."

Investors have a lot at stake in deciphering where the two companies stand. Not only does the AT&T partnership provide Yahoo! with high-margin revenue, the Internet giant also has similar deals with Verizon(VZ), British Telecom(BT) and Rogers Communications(RG).

That brings total revenue from deals with communications companies closer to about $350 million a year, Stifel Nicolaus analyst Scott Devitt pointed out in a research note on Friday. Stifel makes a market in Yahoo! shares.

AT&T's potential reneging on the Yahoo! deal could lead other telecom companies to reconsider their own arrangements. Yahoo! also would lose traffic to its site in the event that these deals are scrapped, because communications companies often direct Web surfers who use their services to access the Internet to Yahoo!'s site.