Forget blogs, Verizon bought AOL for its ad tech business
To understand why Verizon just paid $4.4 billion for AOL, you need to clarify exactly what kind of business AOL is. As CEO Tim Armstrong said in his memo today, AOL is a media company, with well-known brands like Huffington Post, Engadget, and TechCrunch under its umbrella. It also, unbelievably, still has a wildly profitable subscription business, a vestige of the dial-up days when it mailed people CD-ROMS and introduced them to the internet. But its fastest growing business is in advertising technology, and that is what Verizon wants to leverage.
Before he was running AOL, Armstrong was a top sales executive at Google, which helped pioneer online ad exchanges with its DoubleClick division. Over the past few years, he brought that same approach to AOL, creating a real-time bidding platform that helps marketers buy space for their display and video ads on digital properties across the web. Revenue from this business grew at over 40 percent last November and 21 percent in its most recent quarter. By contrast, ad sales across its own properties has grown far slower, and sometimes fallen. “The megatrend of video shifting online is just beginning and will drive consolidation through the ecosystem,” says tech investor Rick Heitzmann.
“Verizon’s buy of AOL will cause some head-scratching among people who are stuck thinking that every industry is an island. Why would a wireless provider want to buy an online media site?” said Forrester analyst James McQuivey. “But the deal makes sense in a way that Comcast’s intra-industry urge to buy Time Warner did not: With this move, Verizon will become a global media player, extending its reach to hundreds of millions more people than it could in its current business, at a much lower cost than trying to acquire a different network provider.”
While most people think of Verizon as a mobile operator and cable company, it already has a large business in mobile advertising. It knows an awful lot about its customers, and helps marketers to target various demographics. Here’s a quick explainer from Verizon’s FAQ on its ad business:
“When you use your mobile device, you often see ads on websites and apps. Using information we have from customers, we help marketers reach audiences with more relevantinformation we use for this program includes the postal address we have for you and certain consumer information such as your device type and language preference, as well as demographic and interest categories obtained from other companies. This information might include your gender, age range, and interests (i.e. sports fan, frequent diner, or pet owner). In addition, we will use an anonymous, unique identifier we create when you register on our websites. Some examples of Relevant Mobile Advertising could include: For a local restaurant that wants to advertise only to people who live within 10 miles or for a retailer advertising to people who have visited its website online, we help enable these ads to mobile devices on our network.”
A number of former AOL employees shared the opinion this morning that Verizon would quickly move to spin out or close down the owned and operated media brands, focusing on the ad tech instead. Over at Recode, Peter Kafka got a few quick quotes from Armstrong, who left the door open to that possibility. And analysts concur.
“After Verizon sells off the bits it doesn’t want or need, like the Huffington Post, it will actually have acquired a decent customer list at relatively low cost per head,” says McQuivey. “Not to mention advertiser relationships and ad selling and measurement technology it would have taken years to build. The net of this deal is good for Verizon.”
Verizon said it expects the deal to close this summer, pending regulatory approval. Like the merger of Comcast and NBC Universal, this deal would combine a major content company with a network operator who owns the pipes. That kind of potential for conflict, especially around net neutrality, is another reason Verizon may want to spin out some of the media business. (Comcast had to make net neutrality concessions through 2018 to win approval.)
Verizon has also made plans to launch its own streaming video service this summer, focusing on delivering video to mobile devices and perhaps going over the top into your living room. As Verizon CEO Lowell McAdam said in today’s press release on the purchase, his company has been “strategically investing in emerging technology, including Verizon Digital Media Services and OTT, which taps into the market shift to digital content and advertising. AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.” AOL trails only Google and Facebook in terms of the number of people it reaches through online video.
The irony of all this is that when AOL merged with Time Warner back in 2000, it had a similar vision. At that point AOL was playing the role of Verizon, the connector charging a monthly subscription to access a network. Time Warner was the media giant who would provide amazing synergies for advertising. That $183 billion mega-merger turned into one of the most infamous boondoggles in the history of corporate America. For all the talk of a tech bubble today, no matter how this deal goes, it will cost shareholders a lot less money than it did during the dot-com era.