Verizon Targeting Digital Ad Business With AOL Buy

Verizon (NYSE:VZ) has agreed to buy AOL (NYSE:AOL) in an all-cash deal, valuing the company at $4.4 billion or $50 per share. The acquisition will enable Verizon to integrate AOL’s content programming and targeted advertising technology with its massive wireless network. The carrier clearly stated post the deal announcement that its primary focus was on AOL’s rapidly expanding programmatic ad offerings, which are likely to open new avenues of revenue generation, going forward. ^{[1] [2]}

Considering that the U.S. wireless market is largely saturated and adding new subscribers in the current competitive environment a costly affair, it is natural that Verizon is looking at new ways to make more money from its existing 109 million subscribers. The carrier generated $22.3 billion in sales from its wireless business in the first quarter ending March 2015, which translates to about $206 per subscriber. In its FiOS wireline business, which contributes around 35% of total wireline revenues, it made $3.35 billion in the same period, translating to around $195 per FiOS subscriber.

While AOL’s impact on Verizon’s foray in digital advertising and its revenue per subscriber remain  to be seen, it is important to understand that it is likely to remain a very small component in the near term. For perspective, AOL is currently less than 2% of Verizon in terms of market cap and overall revenues.

We have a price estimate of $58 for Verizon’s stock, which is over 10% ahead of the current market price.

See our complete analysis for Verizon

AOL’s Advertising Business Is Key

Having transformed significantly since the collapse of its disastrous merger with Time Warner Inc. 15 years ago, AOL is currently involved in: 1)  generating original content and providing site access to subscribers;  building video and media brands such as The Huffington Post, TechCrunch and Engadget; and, 3) providing algorithm-based intelligent online advertising solutions to marketers. The company generated $625 million in revenue in the first quarter this year, registering growth of over 7% over the prior year quarter. Sales in its advertising business, reported as AOL Platforms, registered growth of 21% year over year  to about $280 million, driven by growth of 80% in programmatic ad sales.  AOL Platforms now contributes almost 45% of the company’s total revenue compared to about 40% a year ago. AOL’s other businesses — the Brand Group (which includes The Huffington Post, TechCrunch and Endgadget) and the  Membership Group — reported sales growth of 10% and negative 7%, respectively, in the same period. ^[3]

Verizon seems to be focusing more on leveraging AOL’s advertising offerings for the mobile platform, and there is speculation that it might go ahead with AOL’s earlier envisaged plans of spinning off The Huffington Post after closing the transaction, expected by the end of this summer. Monetizing the rapidly growing consumption of online content on mobile devices is both an opportunity and a challenge and AOL’s focus on this is likely to have been an important factor, if not most important, for Verizon’s interest in the company. AOL’s mobile revenues grew over 100% in the first quarter and there is still significant upside to this considering that a large proportion of the company’s mobile inventory currently does not show ads. ^[4]

Another positive in AOL’s recent performance is that it has been successful in developing cross-screen and multi-screen targeting capabilities for ad campaigns. The effectiveness and adoption of such campaigns is likely to expand further (from current 56%) with the company’s latest offering — ONE by AOL. The company claims that ONE will help companies understand how consumers react to their ads and how much of their advertising expenditure actually converts into revenues. Such an advanced algorithm is likely to help AOL better compete with behemoths Facebook and Google in the digital advertising space. According to research agency eMarketer, AOL had a share of about 0.75% in the $145 billion global online ad business last year, compared to Google’s 31.4% and Facebook’s 7.9%. The agency predicts that AOL’s digital display ad revenue in the U.S. is likely to rise by around 14% in 2015, behind the industry’s average increase of 20%. It also estimates that AOL’s share in the $27.05 billion U.S. online ad business is expected to be 3.5% this year. ^{[5] [6] [7]}

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1. AOL News Release, May 12 2015 [↩]
2. Verizon News Release, May 12 2015 [↩]
3. AOL (AOL) Tim M. Armstrong on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 8 2015 [↩]
4. Verizon Bets on Video Ads in $4 Billion Deal for AOL, NY Times, May 13 2015 [↩]
5. Verizon’s Risky Bet on AOL’s Ad Business, MIT Technology Review, May 12 2015 [↩]
6. Report: Facebook Pulls Ahead Of Google In US Digital Display Ad Revenues, eMarketer, March 11 2014 [↩]
7. AOL Unveils ONE by AOL, an Advertising Platform, NY Times, April 14 2015 [↩]