Stringing wires isn't the future.

Photographer: Mark Wilson/Getty Images

Verizon Decides a Network Isn't Enough

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Verizon is paying $4.4 billion for AOL. That kind of money will buy you, I dunno, one-fifth of a messaging startup. Or about one-fortieth of the AOL that merged with Time Warner in 2000.

That epic fail of a merger involved an established, profitable media company betting its future on an alliance with an online pioneer whose core business, dialup Internet access, was about to be rendered superfluous. This time it’s an established, profitable telco betting about 2 percent of its market value on some advertising technology and delivery systems, an assortment of online media properties (some of which may be spun off) and, remarkably, about $600 million a year in leftover Web-access subscription revenue. It’s just not that big a deal, in economic terms at least.

Still, there’s lots of symbolism -- not to mention memories. Plus the reality that, while Verizon and fellow Bell-breakup survivor AT&T have done a tolerably good job of transitioning from a collapsing land-line telephone business into the growth areas of wireless and broadband, it's not so clear where they need to head next. Writes Dennis Berman in the Wall Street Journal:

The answer is that no one has the answers. It is a war of all against all. Platforms against platforms. Content against content.

There does seem to be one answer that everybody in the broad field of media and communications seems to be reaching these days, though. It’s that pipes (and their wireless equivalent, antennae) aren’t enough. Just because you control the delivery networks, it turns out, doesn’t mean you really control the delivery networks.

QuickTake Net Neutrality

This is partly because, at least in the U.S., the government won’t let you. With the Federal Communications Commission’s tough new net neutrality rules, the operating latitude of broadband providers (and this now includes cellular broadband) has been significantly circumscribed. As long as there’s a Democrat in the White House -- and barring another big FCC appeals court loss -- cable companies and telcos are going to be expected to maintain “dumb pipes” that don’t discriminate between the different traffic that travels over them. As I’ve written before, I think this regulatory stance makes economic sense, but I’m not sure of that. I am sure that it amounts to a remarkable case of the government stepping in to favor one set of industries and disadvantage another.

The favored industries include pretty much any company involved in media and communications that doesn’t already control an expansive network of connections to people’s homes or ears. It’s West Coast companies with lots of technology smarts -- Google, Amazon, Facebook, Netflix -- that seem to have been the biggest beneficiaries, though. Yes, it has become cliche to say that “software is eating the world,” but companies with superior software capabilities really do seem to be eating our communications networks. They’re just better at finding new ways to deliver cool services and content than are the established, regulated telephone and cable companies.

So Verizon is trying to buy its way into a little of that digital magic. It’s pretty tarnished magic in AOL’s case. Marissa Mayer of Yahoo! -- not exactly a cutting-edge technology play itself -- once dismissed the prospect of a merger with AOL as (this is Kara Swisher’s paraphrase) “small, unexciting, uninspiring and backward-looking.” But AOL is at least in Verizon’s neighborhood (both companies are based in lower Manhattan), and given the company’s struggles during the past decade AOL Chief Executive Officer Tim Armstrong could make a halfway-credible case in his e-mail to employees this morning for why they should be excited about the deal:

For you this means growth, it means mobile, and it means compensation that will be equal or better to your AOL compensation.

Verizon CEO Lowell McAdam, meanwhile, described the deal like this:

Verizon’s vision is to provide customers with a premium digital experience based on a global multiscreen network platform. This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience.

Need a translation? How about this: “We don’t want to be just a dumb pipe.”

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net