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Verizon Aims to Rebuild TV for Mobile Age With AOL Purchase

Verizon’s $4.4 billion cash deal for AOL left some pundits befuddled: What in heaven’s name was the nation’s No. 1 wireless carrier thinking in buying an aging Internet brand?

The answer: The telco is looking to use AOL’s ad technology — and trove of video content — as it invents the next generation of over-the-top video for mobile users. According to the investment thesis, that will fuel demand for faster mobile Internet speeds from Verizon Wireless, which has about 109 million U.S. retail customers, and generate new revenue from advertising for the telco.

“As the world moves toward the mobility marketplace, it makes perfect sense that Verizon is making a strong play for the mobile OTT market, which is dominated by shorter-form content,” said Jesse Redniss, partner with media-consulting firm Brave Ventures.

There’s no guarantee Verizon can successfully stitch AOL into its operations. The Internet company is to become a subsidiary, if and when the deal closes, with CEO Tim Armstrong remaining. But the deal reps a relatively small bet on what may become a major avenue for media distribution, especially when compared with rival AT&T’s $48.5 billion bid for DirecTV. “Verizon is acquiring a piece of what goes into its overall strategy as part of its connectivity business,” Gartner principal research analyst Bill Menezes said. “Where are you going to find growth? By driving users to content.”

Verizon is set to march into OTT in the second half of 2015 to challenge Dish’s Sling TV and others. The carrier has so far announced Internet-distribution deals with Viacom, ESPN (for college sports), CBS Sports (for certain events) and AwesomenessTV. It could funnel AOL’s original video into the mix. Last year AOL produced 80 pieces of original video content, and this year promises to deliver 3,600, including shows featuring James Franco and Jared Leto.

The OTT service is a play for cord-cutters (and “cord-nevers”), typically younger consumers who have been less inclined to subscribe to pay TV, which would include Verizon’s own FiOS TV. AOL’s ad-serving technology, a key driver of the deal, can target commercials to viewers far more precisely than can traditional TV. That would, theoretically, let Verizon better monetize individual pieces of content and, coupled with the telco’s ability to track viewing patterns, means Verizon’s Internet-video service could optimize spending to cherry-pick the most popular (and most profitable) content instead of having to buy distribution rights for entire network suites.

Still, Verizon will have plenty of wrinkles to iron out. Not all of AOL’s content divisions likely will mesh with Verizon. Reports last week emerged that AOL was in talks to sell the Huffington Post. But AOL insisted it was retaining all its content brands. Said VideoNuze analyst Will Richmond, “I’d expect most (of AOL’s) content properties to be sold off to a third party, likely at a pretty healthy price.”

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