Verizon's AOL Acquisition for Ads and Content Makes Sense: Analysts

By acquiring AOL, Verizon will bring in AOL's established online advertising backbone as well as its varied content.

Verizon AOL merger

Verizon's $4.4 billion acquisition plans for AOL will help the prospective parent company gain additional online advertising tools as well as a stream of fresh and varied content, both of which can help attract more users in the face of growing online advertising competition from Google, Facebook and others.

That's the take of four industry analysts who shared their insights with eWEEK about Verizon's May 12 announcement that it is buying AOL to bolster its content and online advertising capabilities.

"Overall, I think it will be a good deal for both companies," said Charles King, principal analyst of Pund-IT. "My feeling is that the premise everyone is following these days is that mobile technology is going to represent the path of future business opportunities" and that online advertising acquisitions like the Verizon AOL deal can help strengthen such ties.

"We're seeing a lot of companies, like the recent Yahoo-Microsoft search deal, as a good example, creating opportunities to allow them to become alternatives to Google," said King. "Google and Facebook are the two big players here. There are other players who want a piece of that action, and if they don't move soon, there's a good chance that they will be frozen out."

The Verizon AOL deal is a good example of such synergies, he said. "And the relatively modest cost for the deal is indicative that this may not be the only such deal that Verizon does."

For AOL, "it's hard to think of a stronger, better parent for AOL to have," King explained. "Verizon is certainly the 700-pound gorilla of the wireless world."

For Verizon, the key benefit of the purchase is acquiring AOL's established online advertising platform, even more than the company's content, Andrew Frank, an analyst with Gartner, told eWEEK in an email reply.

"I believe this signals a significant shift in the structure of the entertainment and advertising distribution market—it's clear that digital distribution is the future of all media, and that carriers seek to be more than just 'dumb pipes' in this new order of things," wrote Frank.

A key benefit from the deal for Verizon is that the company "has an opportunity to re-energize its local marketing value proposition, which has flagged with the decline of the Yellow Pages business," by offering a range of advertising services alongside its communication services, wrote Frank. And at the same time, AOL's video platforms could help Verizon "take a leadership position in providing the next generation of automated, targeted TV and online video advertising services," while also further leveraging its mobile footprint "to become a significant player in the fast-growing market for mobile advertising and content services," he explained.

Frank said he also believes that AOL's ONE ad tech services, which allow marketers to build their ad campaigns one time across all screen sizes and device types, "have at least as much potential value to Verizon as its content business, even though AOL's market penetration in this area has not been as significant as its competitors," he wrote. "Verizon has an opportunity to create more separation between AOL's content and advertising businesses, which could benefit its ad tech offerings, which are substantial, by removing any appearance of being too close to its publishing business."

One thing that could interfere with the deal, he said, is if government regulators see the proposed acquisition "as a call for more rules or reforms around the role distributors can play, especially when it comes to data and privacy."

Patrick Moorhead, principal analyst of Moor Insights & Strategy, told eWEEK he sees the merger "reflecting the challenges that carriers are having in differentiating themselves through their 'pipes,'" which are becoming more and more a commodity rather than unique delivery mechanisms to their customers. That means that "carriers need something else to provide stickiness" so that their customers and prospective customers keep coming back to them online, he said. "The benefits to this could be that it gives customers more reasons to stick with Verizon, which could result in improved margins."

On the other hand, said Moorhead, "I'm a bit skeptical right now, given the kind of content AOL has. They have assembled some interesting Web news content, but outside of that, I'm not seeing popular, exclusive movie, TV show or music content."

In addition, the AOL brand today "is nowhere even near as relevant as they were in 1995," when it was a huge online player, he said. "AOL [back then] was a bit like Google and Facebook are today."

Another analyst, Rob Enderle, principal of Enderle Group, is more skeptical of Verizon's move and isn't so sure that the carrier will get as much out of the deal as the company thinks it will.