×

Verizon-AOL: The Rationale Behind $4.4 Billion Deal

Acquisition is a low-risk bet on future of mobile video and advertising

The best way to understand Verizon Communications’ $4.4 billion acquisition of AOL is to think of it in the mold of Comcast’s 2010 purchase of NBCUniversal.

“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.

Popular on Variety

More Biz

  • Led Zeppelin Stairway to Heaven

    Department of Justice Backs Led Zeppelin in ‘Stairway to Heaven’ Copyright Case

    The U.S. Department of Justice has weighed in on the next big music copyright case on the horizon following the Katy Perry “Dark Horse” decision, and taken Led Zeppelin’s side in the long-running copyright dispute that pits the writers of the group’s anthem “Stairway to Heaven” against the publishers of the earlier song “Taurus” by [...]

  • Harvey Weinstein

    Harvey Weinstein Prosecutors Make Last-Minute Move to Bolster Case

    The Manhattan D.A.’s office is making a last-minute bid to strengthen its case against Harvey Weinstein, who is set to be tried next month on charges of rape and sexual assault. Prosecutors notified the court on Tuesday that they will seek a new indictment. The D.A.’s office wants jurors to hear from Annabella Sciorra, the [...]

  • Jeffrey Epstein

    Jeffrey Epstein's Autopsy Rules That He Died by Suicide

    Jeffrey Epstein’s death earlier this month has been ruled a suicide by hanging. The New York Times reported on Friday that the city’s medical examiner has officially made the ruling six days after Epstein was found dead in his jail cell at the Metropolitan Correctional Center in Manhattan. According to the Times, which cites a [...]

  • America Ferrera Eva Longoria

    America Ferrera, Eva Longoria and More Sign Letter to Latinx Community: 'We Will Not Be Broken'

    America Ferrera, Eva Longoria and more have signed a letter published in several media outlets on Friday standing in solidarity with the Latinx community. In response to the heightened tension surrounding President Trump’s immigration agenda, the El Paso shooting that targeted Latinx people and the ICE raids in Mississippi, the letter addresses the language used [...]

  • Research Firm Screen Engine/ASI Acquires TicktBox

    Screen Engine/ASI Acquires TicktBox, an Entertainment Marketing and Ticketing Startup

    Screen Engine/ASI, a market research firm that specializes in focus-group testing of movies and TV pilots, has acquired ticktBox, which operates a digital marketing and ticketing platform used by movie distributors, exhibitors, and TV networks. Terms of the deal, which closed Aug. 9, weren’t disclosed. With ticktBox, SE/ASI will have one of the largest databases of [...]

  • NEW YORK, NEW YORK - AUGUST

    Eric Reid, Jemele Hill – and Colin Kaepernick? - Take Jay-Z to Task Over NFL Partnership

    When news of the presumably lucrative entertainment and social-justice deal between Jay-Z’s Roc Nation and the NFL leaked on Tuesday, initially there was a surprising lack of public reaction or outcry. But after a press conference where Jay and NFL commissioner Roger Goodell officially announced the deal at Roc Nation’s New York offices yesterday — [...]

More From Our Brands

Access exclusive content