With AOL In The Bag, What’s Next For Verizon?

by Trefis Team
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Verizon (NYSE:VZ) closed its $4.4 billion acquisition of AOL on Tuesday, June 23, about six weeks after the deal was announced. The company has purchased all of AOL’s outstanding shares for $50 per share in cash for a total price of $4.4 billion, including $3.9 billion in equity and $451 million of debt. AOL is now a subsidiary of Verizon and will no longer be traded on the New York Stock Exchange.

The company also gave out details on the expanded role of AOL CEO Tim Armstrong, who will continue to lead AOL operations post-closing. He will report to Marni Walden, Verizon executive vice president and president of Product Innovation and New Businesses. On the other hand, Bob Toohey, president of Verizon Digital Media Services, will now report to Armstrong.

AOL’s mobile and video advertising technology was the primary draw for Verizon, as it looks to capitalize on two of the biggest trends in the media and advertising industry: 1) The shift of media viewing time from traditional media to mobile devices 2) The move from manual digital ad purchases to programmatic buying. Here’s a quick review of how the acquisition could benefit Verizon.

We have a price estimate of $56 for Verizon’s stock, which is about 15% ahead of the current market price. AOL’s shares ceased to trade after the market closed on Monday.

See our complete analysis for Verizon

Capitalizing On The Shift Of Ad Dollars To Mobile

The U.S. wireless market is largely saturated, and adding new subscribers in the current competitive environment is a costly affair. Verizon is looking at new avenues to make money from its existing 109 million-strong subscriber base. Mobile advertising seems like a natural fit for the company given its massive wireless subscriber base, customer datasets and its control over the so-called “wireless last mile.” Advertising dollars are quickly moving away from traditional media such as TV and newspapers, onto the web and mobile devices. Total digital ad spending is expected to increase 15% to $58.6 billion this year, according to research firm eMarketer. Mobile ad spending is expected to grow 50% this year to $28.7 billion, eMarketer estimates. Verizon estimates that mobile will account for 80% of consumers’ media consumption time in the coming years.

AOL’s Robust Programmatic Ad Platform 

AOL’s advertising business has proven quite adept at monetizing online media consumption, utilizing its programmatic platform, measurement and targeting capabilities. Over the past two years, its revenues from the programmatic platform have grown by over 100%. Verizon is hoping that it can drive additional revenue growth by stacking AOL’s robust ad tech on top of its 109 million wireless subscribers. Ads are increasingly being delivered via programmatic advertising –which is essentially an automated means of matching advertisers with media consumers on various platforms in a targeted manner, while collecting valuable data along the way. [1]. About 28% of all digital video ads will be purchased programmatically this year, increasing to 40% next year. The AOL acquisition could position Verizon well in the rapidly expanding market. Additionally, the combination of AOL’s ad measurement and targeting capabilities with Verizon’s massive customer database might allow for better targeted mobile ads. The deal could also bring in additional advertiser relationships for Verizon that could have otherwise taken years to build. 

What Is In Store For AOL’s Content Business?

Over the past few years, AOL built up significant content assets. These include the Huffington Post, tech sites Engadget and TechCrunch, as well as its sprawling collection of AOL-branded news and video sites. The question is what will become of them under Verizon.

Both Tim Armstrong and Verizon Chairman and CEO Lowell McAdam have reiterated that content will continue to be the focus for the new AOL. They were particularly enthused about the Huffington Post, which has an audience of around 200 million. The large reach of over 200 million unique browsers that AOL has (including the audience for its other sites), combined with Verizon’s growing video aspirations, could mean that Verizon really does want to establish a content business. In an ideal scenario, Verizon could leverage AOL’s web and video content, its huge subscriber base and AOL’s existing ad tech abilities to improve its top line and introduce a new stream of revenue.

Verizon Is Beefing Up Its Content Offerings, Plans Ad-Subsidized Data

AOL is a video behemoth in its own right, behind only YouTube and Facebook (NASDAQ: FB) in terms of unique video views, according to Comscore. The company’s large network of original content is likely to be quite valuable to Verizon. AOL has also done quite well selling ads against those videos. Advertising revenue generated by AOL’s media sites grew 12% in the first quarter this year, driven primarily by video.

Separately, Verizon is also planning a new over-the-top mobile video service that could launch later this summer. The service could be underpinned by Intel’s online TV platform, which Verizon bought in early 2014. The company is currently in the process of securing deals with content providers for live and on-demand content. Notably, the offering will support sponsored data, with advertisers subsidizing the cost of consumers’ video consumption. We believe that the move could help the service ramp up relatively quickly at the expense of competitors, since video is a bandwidth hog. Verizon believes that this arrangement would comply with the FCC’s new net neutrality rules.

Verizon Still Has A Lot To Prove

While mobile and video advertising does seem like a promising long-term bet for Verizon, the company still has a lot to prove. Like most other carriers, Verizon has a mixed history of delivering quality customer-focused services and applications and it remains to be seen whether it can create a compelling ad platform atop its massive wireless network. Additionally, the mobile ad market is dominated by younger and more tech-savvy companies, who have proven relatively nimble in a very competitive and dynamic market. It could take time for an older and more mature company like Verizon to adapt to the market. Additionally, we will have to wait to see how the business-model of combining an ad-platform with a wireless carrier pans out, given the potential for conflict and net neutrality issues.

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Notes:
  1. Verizon Bets on Video Ads in $4 Billion Deal for AOL, NY Times, May 2015 []
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