Verizon Buy Speeds the FadeOut of AOL

Verizon Buy Speeds the Fade-Out of AOL

7 minute read
Scott M. Fulton III avatar

You've probably heard today's big M&A news: Verizon is acquiring AOL.

If you're wondering why Verizon is spending $4.4 billion on a major web content provider, consider AOL’s last quarterly earnings report, issued just last Friday. In the quarter ending March 31, AOL Inc. earned $483.5 million in advertising-related revenue.

When you break down revenues by company segment, $279.8 million of revenue came from the AOL Platforms Group. Nearly 45 percent of AOL’s total revenue for the last quarter came from its advertising platforms — the use of servers to push content to devices.

Mobile Native

What types of devices are we talking about?First and foremost, the mobile ones — and this is what makes AOL attractive to Verizon.

In April 2014, AOL began the formation of a mobile native advertising unit. Although major AOL content brands including Huffington Post and TechCrunch were said to be key to this unit, as ad execs are fully aware, the concept of “mobile native” boils down to attaching relevant advertising to what the user is doingon mobile devices.

A 2014 survey of advertising managers [PDF, registration required] conducted by the Rubicon Project in conjunction with India-based ad platform provider InMobi found that some 70 percent of managers surveyed said they planned to invest in mobile native advertising in 2015 — up from 37 percent the year prior — and some 93 percent of that majority said they plan to automate their mobile native ad campaigns.

“By using common creative assets that most digital advertisers have on hand, including brand icons, banners, and text ads,” the report reads in part, “advertisers can use mobile native exchanges to access large-scale demand without significant custom creative development.”

Right now, it would appear AOL is in the business of mobile native advertising automation.The problem is, if advertising is still a business of posting bills, you need some kind of substance to post those bills on.

“You can't do mobile advertising without content – your own or someone else’s,” says Jackdaw Research chief Jan Dawson, in a note to CMSWire Tuesday morning.“And AOL clearly has a variety of different content types against which it can sell mobile advertising already, so the two go hand in hand.”

Understanding AOL

At least until the apps exist for extracting “relevance” from everyday activities (something Google and Twitter, among others, are working very hard on now), advertising must supplement something.That something would probably be called just “something” if it weren’t called “content,” which isn’t much more descriptive.

AOL produces content to which advertising can be attached.But content is not a revenue provider, but moreover a cost — an expense that must be incurred for attracting traffic to the advertising.

As AOL’s last 10-Q states, in the last quarter, $196.2 million in expenses were attributable to traffic acquisition costs (TAC) — what AOL pays third parties in order to publicize itself on the web.The key word in that last sentence is “web.”

In fact, it’s the web that’s the problem.“Mobile native” advertising implies the very opposite of web — the kind of promotion that goes to the heart of what people are doing, not what web pages they’re reading.

If a mechanism existed to bypass this costly web thing, and go directly to the user, much of that TAC could be eliminated.AOL certainly does reap money from its present line of work; it just can’t keep it.

Cue Verizon

So what might make AOL an unattractive investment in Goldman Sachs’ eyes, based on its downgrade issued late last week, might make AOL quite attractive to a company capable of re-engineering it.

This is where Verizon enters the picture.In January 2014, Verizon announced its intent to purchase OnCue, the video technology that, at the time, was being created by Intel.Since that time, Verizon has been busy re-engineering OnCue, or whatever it ends up being called (something beginning with “A,” perhaps?) into a mobile LTE video service.

Here’s Verizon’s theory:If more subscribers consumed LTE bits in greater bulk, then the cost for delivering each bit would go down.That was the theory Verizon Executive Vice President John Stratton shared with telecommunications leaders this morning during an industry conference.Verizon needs programming, but for that programming to be meaningful, it needs popularity.

As Reticle Research chief Ross Rubin told CMSWire, “AOL's fastest growing segment is Platforms, which offers advertising automation technology to third-party Web sites.It may be something the company could use in its OTT [over-the-top] video services such as the one expected to launch based on technology acquired from Intel.”

So-called “over-the-top” technology is a means for delivering video without going through the typical cable or even fiber optic delivery route.It doesn’t seem like an OTT box, being situated beside a big-screen HDTV, would be a very mobile device.But in Verizon’s world, that doesn’t matter because it would be a wireless one.

Learning Opportunities

Verizon's Strategy

In recent weeks, Verizon has been resolving the issue of what people would want to watch on this non-mobile, mobile LTE video service.In March, it reached a deal with DreamWorks Animation, followed the next month by a deal with CBS Sports.

Verizon says it’s looking for the kinds of content brands that could attract the viewer who fits the profile of the OTT subscriber, the “cord-cutter.”Know of any brands, right off-hand?

“Huffington Post is by far the broadest, most general news property and Verizon could leverage it in a number of ways such as branded FiOS news channels or mobile content,” stated Ross Rubin.He noted, however, there could be some conflicts of interest with AOL-brand publications like Engadget and TechCrunch publishing stories about their new corporate parent.(Rubin has been a contributor to both publications.)

Dawson noted, “This is an extension of the hedging strategy Verizon has been building against the stagnation and saturation of its traditional wireline business and the shift away from traditional pay TV.

“It's been doing that at two different levels: becoming a stronger provider of underlying connectivity and content delivery for all content providers online on the one hand, and building over-the-top video services which can run over any network on the other,” Dawson continued.“This is a strong extension of the latter strategy, and immediately massively increases the size of Verizon's over-the-top content offerings.”

Not with a Bang

Yet the least effective brand of all for AOL, has been the one closest to home.

“The AOL brand certainly has resonance with the lingering dial-up users,” said Rubin.“Beyond that, AOL did not leverage the corporate brand for the other groups.The media brands are much stronger to their constituents than the AOL brand.”

451 Research’s Michael Essery agrees: AOL’s real value for Verizon lay with the underlying mechanism. The rest of it is gravy.

“While AOL’s premium content properties have value and count more than 200 million monthly eyeballs,” stated Essery today, “Verizon’s real interest in AOL is access to the platform technology for video content monetization, as well as its in-house expertise and experience in growing a digital content business in a multi-channel world where mobile is increasingly the dominant screen.”

Although Verizon’s Stratton provided few details on the AOL deal during his talk with conference attendees Tuesday morning, he did punctuate his company’s overall strategy in a way that clearly illustrates everything our analysts have told us today.

“You know, we are principally a broadband company,” said Stratton.“That’s what we do...We are in the TV business, it is still a good draw, [and] triple-play still matters a lot.But we see a very, very significant shift in the desires of our customers, in terms of how they consume video.

“Obviously, in recognizing this,” the XVP continued, “we’ve begun to make investments in enabling the next generation of video delivery, which is all the OTT stuff, right?The AOL, EdgeCast, OnCue, et cetera.”

At least AOL was the first item on Stratton’s “et cetera” list of “all the OTT stuff.”Thus ends the story of how the online industry’s most dominant distraction away from television, in the era before the Internet, became absorbed into a telephone company looking to enter the television business.

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