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.
Verizon’s AOL Acquisition for Ads and Content Makes Sense: Analysts
“With Google entering the carrier space as a [mobile virtual network operator] and T-Mobile getting ever more aggressive in their moves to take [market] share, Verizon is looking for an edge and thinks content is that edge,” said Enderle. But to make it all work, “they need a critical mass of content and AOL alone won’t get them there, suggesting other acquisitions in the future or that this will fail.”
At the same time, if Verizon uses the AOL content providers to heavily promote Verizon, “these publications run the risk of becoming annoying, or worse, untrusted and will lose whatever value they started with,” said Enderle. “I think this showcases that Verizon is scared to death of what Google and T-Mobile are doing but really have no good idea what to do about it so they are rolling the dice and hoping content can change the battlefield.”
AOL Fits Verizon’s Over-the-Top Content Streaming Future
John Stratton, president of operations for Verizon Communications Inc., spoke at a Jefferies global investment banking conference in Miami on May 12, shortly after the deal was announced and said that the merger with AOL “is a very beautiful complement to the foundation that we’ve been building for several years in digital media services,” according to a transcript of the event.
One area where the merger will show promise is in Verizon’s transition to over-the-top delivery of curated video services to users over existing channels, said Stratton. “For us, the principal interest was around the ad tech platform that [AOL chairman and CEO] Tim Armstrong and his team has done a really terrific job building. We really like the technology a lot and we think of it as a key enabler for us as we begin to generate revenue and value above the network layer. So we’ve talked a lot about our over-the-top video ambitions and this is for us a very important cornerstone enabler as part of that broader strategy,” he said.
For AOL, which merged in 2001 with cable company Time Warner, the latest Verizon acquisition proposal has similar risks to the earlier merger, which was slated at the time to reinvigorate both AOL and Time Warner, but left both sides wanting, said Enderle. “The Time Warner merger comes to mind here in that it failed because the cultures of the two entities were just too different,” he said. “Verizon is more like Time Warner than it is like AOL, suggesting that problem will recur.”
The Verizon AOL deal, which had been rumored earlier this year, will bring together the largest U.S. mobile carrier and the AOL video and print content network, including the AOL Huffington Post Media Group.
“Verizon’s vision is to provide customers with a premium digital experience based on a global multi-screen network platform,” Lowell McAdam, Verizon’s chairman and CEO, said in a May 12 statement. “This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience.”
The deal allows Verizon to buy AOL for $50 per share, with AOL becoming a wholly owned subsidiary of Verizon when it is completed, the companies said. The transaction, which is expected to close this summer, is subject to customary regulatory approvals and closing conditions.
AOL began originally in 1985 as an online communications service called Q-Link, when the company was originally known as Quantum Computer Services. Quantum launched its first instant messaging service in 1989 and introduced the “You’ve got mail!” announcement that became a core identity of the company, which was renamed AOL, or America Online, in 1991.
Large media acquisitions like this one are increasingly common today as companies seek more ways of attracting new customers with increased content that users find valuable. Competitors, including Facebook, are also on the move constantly to find new sources of content that can help them stay one step ahead of competing content and advertising networks.
In March, a report surfaced saying that The New York Times, BuzzFeed and National Geographic, among others, are planning to launch a test program to host their content on Facebook, allowing users to read the latest news and feature articles without leaving the social network. Such moves help content sites such as Facebook remain “sticky” and important for users.
Web portals, including AOL, Yahoo, Google and others, have been following similar strategies to remain relevant in a fast-changing online and mobile-centric world so they can grow and sustain their audiences.