Back in February, I posted about the Qwest analyst conference and a brief conversation with Ed Mueller, Qwest’s CEO. Part of what I said was as follows:

On the wireless side, the company is planning to rethink its partnership with Sprint and form a new partnership (possibly with Sprint again but likely with someone else) which would provide deeper integration but also a portfolio for Qwest that would more closely mirror its competitors’. Mueller appears confident that he can get this, but given that Sprint has historically been much more aggressive about MVNO activities than the other major wireless carriers, and Verizon and AT&T have very little incentive to play ball, I’m not hopeful. It looks like Mueller may be a little naive in this respect.

This was a major theme from the event and one that got a lot of coverage at the time, though things had been fairly quiet on that front since. Well, today Qwest announced that it had signed a deal with Verizon Wireless. But rather than tighter integration, Qwest has gone for a far looser integration, and has taken another step back from direct participation in the wireless market. In the space of just four years, it has gone from being a wireless player in its own right to being an MVNO to being a reseller:

Qwest Communications International Inc. (NYSE: Q) and Verizon Wireless announced today they have signed a 5-year agreement for Qwest to market and sell Verizon Wireless service beginning this summer.

…

Under the agreement, Qwest customers will have access to the full line of Verizon Wireless handsets, smartphones and BlackBerry devices, as well as high-speed broadband wireless services for e-mail, Internet access and multimedia services. Residential customers will be able to choose “wireless only” and be billed directly by Verizon Wireless, or include Verizon Wireless service as part of a Qwest bundle with their home phone, Internet and video services, and receive one bill from Qwest for all services.

Ed Mueller had said in my conversation with him that, in the TV market, Qwest was perfectly satisfied to merely take commissions from its satellite partner, rather than participating directly (according to that conversation, these commissions are around 15%). It now appears that Qwest is willing to take exactly the same approach with wireless. Having recognized that it doesn’t have the skills to compete in this market itself, it is hitching its wagon to a player that can. But again, it is limiting its upside in one of the few markets that are still really growing. Once again, it appears that Qwest is not all that concerned about growth.

In the meantime, this is somewhat bad news for Sprint, which will have to cope with the loss of one of its resellers (albeit not the largest) and the expansion of Verizon Wireless’s ability to compete through bundling with wireline products, on top of all the other bad news it’s had recently.

At the time I wrote yesterday’s entry, I hadn’t yet seen the letter from Steve Ballmer to Jerry Yang about the reasons for calling off the deal. It does provide some more detail about exactly what Yahoo! was doing that was preventing the merger from going forward:

Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number
of reasons[.]

In essence, it was Yahoo!’s pursuit of the search relationship with Google over the last several weeks that put a real spanner in the works. To Microsoft, the whole point of the deal was putting up a stronger competitor to Google in the search marketplace, so cozying up to Google was the last thing Yahoo! should have been doing. So it appears that Yang’s decision to go down this route actually served two purposes - it put Microsoft off, but it also provided a way to improve the financials in Yahoo!’s search business, at least in the short term.

Of course, if you’re a Yahoo! shareholder, you would probably say that you’d have taken Microsoft’s 70% premium over any short-term boost in results and the mere possibility of an improvement in the share price over the medium to long term. Even though Microsoft won’t now pursue a proxy fight to replace the board, shareholders may decide that they want someone running the company who will put their interests first. Employees, on the other hand, and customers, will probably breathe a huge sigh of relief. But Yahoo! still has a long way to go to reassure either set of people.

Apparently, Microsoft is giving up in its pursuit of Yahoo!. (that exclamation mark always makes for some awkward punctuation). Officially, the reason is that:

After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal

This is a little odd, because Microsoft had made no secret of its plans to take the bid hostile if it were rejected, and had gone so far as to select board members for a proxy fight. Backing out now because of what Yahoo! was “demanding” therefore seems a bit suspect. It appears much more likely that Microsoft finally joined the board of Yahoo! and most of the rest of the opinionated world in recognizing that the deal was a bad idea. But it’s taken a surprising amount of humility from Steve Ballmer (not normally the most humble of people) to back out at this point, even if Microsoft is wrapping that humility in another explanation.

There has been speculation about what Microsoft might do if its bid fell through for whatever reason, with one of the most interesting alternatives being that Microsoft would go out and buy a slew of companies with the money it would have spent on Yahoo! I’m not sure it makes sense to spend a ton of money just because it had planned to, but it’s certainly possible that Microsoft could use some of its substantial war-chest to make some more purchases.

However, what Microsoft really needs at this point more than anything else (even and perhaps especially as it acquires more companies) is a change in culture, to move more quickly to embrace new business models, and to begin to make the shift from the offline to the online world in its software business. It needs to learn a few tricks from Yahoo!, Google and others in these areas. Otherwise, the risk is that it continues to fall short in everything it does, doing just enough to be a participant in markets without ever leading them. It’s doubtful that this change will happen anytime soon, but perhaps the Yahoo! failure might turn out to be a cause for re-evaluation at Microsoft.