“You have vertical integration — content and distribution,” said Peter Csathy, CEO of Manatt Digital Media. “It’s distribution for the brave new world, which is absolutely mobile-driven.”
According to the companies, the combined Verizon-AOL will give it the scale on the order of Facebook and Google: Verizon touches 70% of Internet traffic across 1.5 billion PCs, TVs and mobile devices, while AOL had 190 million average unique monthly users in the first quarter of 2015.
The Internet-media company expects to dramatically ramp up AOL’s original video programming. CEO Tim Armstrong, on the earnings call last week, said the company produced 80 pieces of original video content in 2014 — and this year will deliver 3,600, including shows with James Franco and Jared Leto. AOL’s content portfolio also includes The Huffington Post, TechCrunch, Engadget and AOL.com.
The combination of Verizon’s distribution and AOL’s content and advertising technology makes the deal a very savvy move by the telco, said Jesse Redniss, partner with media-consulting firm Brave Ventures. “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,” Redniss said. AOL has content that appeals to a broad array of audiences, he added.
That said, the pact is not going to be a transformative event for the telco. Instead, it’s a relatively cheap way for Verizon to expand its reach and get a foothold in the fast-growing mobile video and advertising space.
“It’s a very simple path into a diversified customer base — and especially at that price,” said Forrester Research analyst James McQuivey. The deal makes sense, considering the advertiser relationships and user base Verizon will pick up, plus the value of AOL’s ad-selling, measurement and delivery technologies, “all of which are only going to be more important to Verizon’s digital customer relationships in the future.”
Verizon’s play for AOL is a small bet in terms of its overall strategy, particularly when compared with AT&T’s $48.5 billion bid for DirecTV.
Verizon has an enterprise value of about $350 billion, which means an AOL subsidiary will represent for a little more than 1% of that, according to analyst Craig Moffett. “It’s the tip of the tip of the tail, and it is clearly not going to wag the whole dog,” Moffett wrote in a research note. “Verizon is still, first and foremost, a wireless phone company.”
Verizon Wireless, the nation’s biggest wireless carrier, had 108.6 million retail customers in the U.S. as of the end of March.
Verizon chief Lowell McAdam, in announcing the deal, said AOL would help the telco build a “global multiscreen” video service. He also noted that Verizon has invested in over-the-top technologies, including its acquisition of Intel’s OnCue OTT division for about $200 million last year; Verizon aims to launch a wireless-centric Internet-video service later in 2015. McAdam also called out AOL’s ad-tech platform.
But despite AOL’s much-touted advertising technology capabilities (it acquired programmatic-ad platform provider Adap.TV in 2013), it’s nowhere near Google and Facebook in ad revenue on a global basis. AOL had 0.74% market share of the $145 billion digital ad market worldwide in 2014, while leader Google held 31.4% followed by Facebook with 7.9%, according to research firm eMarketer.
And some are skeptical that AOL’s content divisions will mesh with the telco’s business. “There’s probably a fit on the ad tech side, but not so much on the content side,” VideoNuze analyst Will Richmond said. “I’d expect most content properties to be sold off to a third party, likely at a pretty healthy price.”
It’s worth noting that AT&T has a mobile/over-the-top video strategy, too: The company formed a joint venture with Chernin Group, dubbed Otter Media, funded with $500 million to acquire or develop OTT businesses.