Verizon’s acquisition of Yahoo is a marriage of incompatible cultures. And it won’t end well.

Some relationships come with baggage.
Some relationships come with baggage.
Image: Reuters/Robert Galbraith
We may earn a commission from links on this page.

Carriers refuse to see themselves as merely providing network infrastructure. They want to “add value”—meaning charge more—by using their pipes to sell us media and services. But that content has to come from somewhere. Verizon’s acquisition of Yahoo is but the most recent marriage of incompatible cultures.

Tech companies despise carriers and their culture of poor service, mendacity, and squeezing pennies from their infrastructure. Carriers see techies as arrogant upstarts who speak grandly of their game of billions, even when those billions are in the red. How can anyone imagine they’ll work well together?

The disdain isn’t new. Two decades ago in a Paris café, a long-time France Telecom exec lectured me: “We don’t need your internet. There is no way we can make money on it. We don’t want to be just dumb pipes!”

At the time, France Telecom’s Minitel was a veritable gold mine.

Connected to a home telephone line through the videotex protocol, Minitels were given to subscribers for free. At its peak, the Minitel system was used by 25 million people (in a population of 60 million) and gave French consumers access to a wide range of services (26,000 developed by 10,000 companies).

The device also let France Telecom sneak a tentacle into the consumer’s wallet. You, the entrepreneur, provide a Minitel service: e-commerce, banking, entertainment. The French phone monopoly does the billing and collecting for you by adding a few items to the end of François Dupont’s monthly phone bill. For this service, France Telecom takes a 25% vig.

The Minitel business model was a thing of beauty, a well-tended garden that didn’t admit outsiders. In this world, the internet was the unwashed enemy; its protocols and browsers let anyone anywhere serve anything to anybody who owned a personal computer. PCs were relatively expensive back then, but their speed, media rendering, and expanding universe of applications more than compensated for the initial outlay. Plus, every month when you looked at your phone bill, you’d realize that you were rid of Minitel’s illusion of “free.”

To paraphrase one of my past collaborators: The Minitel did less, but it cost more.

As regulators opened the market to internet service providers, internet access became a commodity. France Telecom could no longer control and tax the services and content that flowed through the network pipes. It was in this climate that I, an interloper who had been living in Silicon Valley for years, was harangued: “We don’t need your Internet.”

Since then, France Telecom (now called Orange), has strained to avoid commodity hell by offering entertainment, home services, and mobile bundles to its customers. It worked (somewhat) for a while, but now their sacrosanct ARPU (Average Revenue Per User) is being undercut by over-the-top services that side-step the carrier while using its pipes. OTT delivers competitive services that the carrier has no control over—Netflix delivers movies, Skype provides phone calls, WhatsApp does text messaging. And when the carrier loses control, it also loses money.

Carriers’ fear of commoditization is alive and bad; how else could we explain Verizon’s necrophiliac acquisitions of AOL and now Yahoo? For the acquired companies, it makes sense. If AOL had been a viable entity instead of walking its user base to the grave, or if Yahoo’s revenues and profits had been on a growth curve, shareholders wouldn’t have clamored for an end to their suffering. For them, an assisted living home was their best choice.

But what about the acquirer? Does Verizon sincerely want to get richer? Will it try to increase its ARPU by piling up media properties and finding ways to decrease choices for its customers, somehow forcing them into paying for content bundles?

We know the theory—we can recite the invocations to synergy, optimization, scale, content discovery, adjacencies, and cross-fertilized distribution. But will the PowerPoint magic work?

Large acquisitions rarely work, unless you’re Warren Buffett. He keeps acquired properties separated and independent through the Berkshire Hathaway empire, and he never buys distressed properties in the first place. His philosophy advocates finding “a wonderful company at a fair price than a fair company at a wonderful price.”

And yet, boards of directors, CEOs, bankers, and industry analyst keep telling themselves and the investing public the same stories. Here, for Verizon, buying two failing properties will make the resulting conglomerate better.

Both AOL and Yahoo bring their own acquisition disaster stories. In 1999, just as Internet Explorer shot past Navigator as the most popular web browser, AOL acquired Netscape for about $10 billion. That was nothing compared to the disastrous $160 billion merger of Time Warner and AOL in 2000, only to see AOL pawned off to Verizon for $4.4 billion in 2015. With Yahoo we have a litany of failed acquisitions: for $5.7 billion, Geocities for $3.6 billion, Tumblr for $1.1 billion.

Marissa Mayer may have made mistakes in her four years as Yahoo CEO—she has her own list of poor-to-middling acquisitions—but does Verizon management actually believe they can succeed where Mayer failed?

When Mayer came to Yahoo, she brought her Google credentials and credibility. She had a (good) reputation and industry knowledge, and yet she couldn’t turn the company around. Some argue that the patient was gone before the surgeon entered the operating room. Indeed, I believe it was a succession of mistakes made by Yahoo’s board, including bad CEO hires before Mayer, that made a turnaround impossible. How can any company survive such a succession of CEOs:

  • Timothy Koogle (1995–2001)
  • Terry Semel (2001–2007)
  • Jerry Yang (2007–2009)
  • Carol Bartz (2009–2011)
  • Tim Morse (interim; 2011–2012)
  • Scott Thompson (2012)
  • Ross Levinsohn (interim; 2012)
  • Marissa Mayer (2012–)

If Verizon’s Board of Directors wants us to believe that Yahoo will not only improve but form a synergy with its older business, they need to give us more than CEO Lowell McAdam’s bland testament: “By acquiring Yahoo’s operating business, we are scaling up to be a major competitor in mobile media…”

McAdam is an experienced executive. Does he really believe he can sell formerly unsuccessful Yahoo services to Verizon subscribers? Or cause existing Verizon subscribers to suddenly generate more advertising revenue for Yahoo properties? And let’s not forget to throw AOL properties and customers into the brew. Yahoo was criticized, fairly, for being hard to define. How does the compounded Verizon explain itself to employees, customers, shareholders? Without a clear explanation, there can be no successful execution.

This cannot end well.

This post originally appeared at Monday Note.