Another data breach at Yahoo! Inc. (NASDAQ:YHOO) has Verizon Communications Inc. (NYSE:VZ) going … Yahooooo?
Supposedly, the $4.8 billion deal Verizon for Yahoo’s organic assets earlier this year could now be in jeopardy. That’s thanks to reports that personal information on 1 billion accounts may have been compromised in 2013 — a full year before a previously announced 2014 hack that took account information on 500 million people.
Investors have reacted by dumping YHOO shares, which fell to below $40 in pre-market trading on Dec. 15, though VZ shares have mostly been spared. The fear is that Verizon might want to cut the price it’s paying for the Yahoo assets, or just cut bait.
But the breach isn’t the real problem — for Verizon or Yahoo.
Talent is the Problem
I once thought Yahoo CEO Marissa Mayer was on to something. I was wrong.
YHOO has been hemorrhaging talent for years. This was happening before Mayer became chief, but it accelerated afterward. She pursued growth by buying talent-heavy companies, then let their best people drift away with stock or cash, rather than getting them excited about Yahoo projects.
Mayer made 53 acquisitions at YHOO, but most were quickly closed, their best people moved to Yahoo’s mobile projects.
Mayer was trying to build a mobile software giant, and in some ways succeeded as Yahoo’s mobile revenues rose. But the cloud technology behind the curtain was left to founder, it was treated as a utility. This left it vulnerable to hacking.
The problem: While you can buy software, you can’t buy loyalty or enthusiasm. Even when Yahoo had contracts tying new people to it, it couldn’t buy their enthusiasm. Many just waited for the contracts to run out, then took their money out the door with them.
In effect, Mayer tried to corporatize entrepreneurs and make talent conform to her priorities. That is now what Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — which she left to head Yahoo — was doing. Google treated its top engineers as talent, building technical tracks and letting them spend time on projects they were passionate about, not just those that would make Google money.
Turning technologists into pieces on a personal chessboard doesn’t work unless you made the chessboard. Mayer’s failed career at Yahoo proves it.
A big discount from Verizon could still get the deal done, with the most ad-focused units placed under AOL and Tim Armstrong. But Mayer must go, and Armstrong is now tainted by his suggestion that VZ go after Yahoo in the first place.
Verizon’s Growth Alternatives
An alternative strategy for Verizon would be to double down on infrastructure. Infrastructure does not have feelings.
Thus, eyebrows were raised on news Verizon CEO Lowell McAdam was saying nice things about Charter Communications, Inc. (NASDAQ:CHTR), which just swallowed Time Warner Cable.
Charter is worth $78 billion, and a deal with Verizon — worth $207 billion — is theoretically possible, assuming McAdam can stand the sight of Liberty Media Group (NASDAQ:LMCA) chairman John Malone in his boardroom. Malone was the largest shareholder in Charter, and put the Time Warner deal together.
VZ also has succeeded in getting approval to buy XO Communications, and could pursue more fiber deals next year, or even go back to building out its own fiber offerings under the FiOS brand.
But McAdam has rejected the idea of going into media, as AT&T Inc. (NYSE:T) did recently in buying Time Warner Inc. (NYSE:TWX), in part to avoid the problems of managing talent.
Yahoo’s failure shows that dealing with Silicon Valley and Hollywood are not as different as they seem. Lowell McAdam’s shareholders have learned an expensive lesson.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
