Verizon's buy of AOL would offer edge against Google, Facebook on mobile ads

In the Internet era, many multibillion-dollar acquisitions sound insanely ambitious and out of line.

In the Internet era, many multibillion-dollar acquisitions sound insanely ambitious and out of line.

Verizon's plan to buy AOL for US$4.4 billion might seem to fit that high degree of corporate ambition -- on the surface. The plan seems especially lofty since first-quarter revenues for AOL were $625 million, just 2% of the $32 billion in revenues that Verizon achieved for the same period.

Even so, a range of analysts on Tuesday said Verizon's acquisition is not terribly out of whack. They noted that Verizon is investing in a long-term future strategy that includes massive wireless video usage by consumers using smartphones and other devices. With the dal, Verizon gets the ability to provide the video content and advertising that AOL brings.

Keeping in mind Verizon's high price to acquire AOL, Moody's Investors Service summed up the rationale: "Despite the high acquisition multiple, Moody's believes that the transaction will support Verizon's long term strategy of promoting and monetizing mobile video."

AOL's ability to provide programmatic advertising to Verizon, once the deal is finalized, may be the most important key to the acquisition's value. AOL's third-party advertising division grew 19% in the first quarter to $231 million, which Verizon clearly appreciates.

The overall advertising market for mobile and other technologies is indeed enormous and growing dramatically. Spending on ad purchases in technology is growing by 15% a year and will surpass $150 billion in 2015, according to Technology Business Research.

In essence, Verizon wants to become more like a Google or a Facebook or a Yahoo, offering up mobile ads to generate revenues. "Even Microsoft [is in that space] and all are flexing their digital advertising muscles and are moving targets," said Ken Odeluga, market analyst for City Index. "The opportunity from monetization of AOL's content far outweighs the $4.4 billion outlay, considering not just the content ownership, but the proprietary digital ad sales platform."

Gartner analyst Bill Menezes called Verizon's costs to pick up AOL "pocket change," given Verizon's size and available cash. "Verizon's risk is pretty low, and the potential rewards are high if it can successfully leverage the whole digital content and advertising capabilities that AOL brings on board," he said.

Menezes said Verizon will gain a key advantage with AOL by being able to expand its video market to whereever a customer -- and not just a Verizon Wireless subscriber -- is located on a cellular or a Wi-Fi signal.

While the short-term benefit to Verizon isn't good, there's no doubt Verizon is hoping to stave off competition from AT&T and other wireless carriers that provide and finance costly LTE wireless and more conventional networks that need to draw in new sources of revenue. AT&T is separately in preparations to buy DirecTV, much for the same reasons that have led to Verizon's plan to buy AOL.

"As the turf battle for how to deliver content to the public escalates, industry leaders in telecom are likely to continue to aggressively pursue acquisition strategies that will help catapult them ahead of their peers," said Phillip Torrence, head of securities and corporate governance practice groups at the law firm Honigman Miller Schwartz and Cohn. Torrence said Verizon and others don't want to find themselves similar to BlockBuster "and miss the next wave in delivery of content."

Longtime industry analyst Rob Enderle of The Enderle Group said Verizon's planned purchase of AOL shows "that Verizon is far more worried than they have let on with Google's aggressive moves into their space and the very aggressive T-Mobile customer acquisition strategy." Unlike Moody's and some other analysts who find the AOL acquisition generally positive, Enderle predicted it will flop.

"Verizon is attempting to change the game, but the strategy they have chosen appears almost certain to fail," Enderle said.

Another criticism of the deal was leveled by Free Press, a nonprofit public interest group. The acquisition is "yet another example of how Wall Street's short-term mindset shortchanges competition and investment in American infrastructure," said Free Press Research Director Derek Turner.

For the $4.4 billion Verizon is paying, the carrier could deploy its FiOS fiber-optic cable Internet service across its entire service area, "bringing much-needed services and competition to communities like Baltimore, Boston and Buffalo," Turner added. "It's hard to see how this transaction is good for anyone but a few brokers and lawyers."

Join the CMO newsletter!

Error: Please check your email address.
Show Comments

Supporting Association

Blog Posts

Disruption Down Under – What’s Amazon’s real competitive advantage?

Savvy shoppers wait in anticipation, while Australian retailers are gearing up for the onslaught. Amazon’s arrival is imminent.

Change across the board: Why boards need to digitally evolve

Traditionally the non-executive board of a company acts in an advisory capacity - attending monthly board meetings to offer overarching advice and guidance typically focusing on:

Jodie Sangster

CEO, ADMA

The most desirable customers you’ve overlooked

“What will really move the needle?” This is a question that keeps leaders awake at night. And at the intersection of some of their top priorities – finding pockets of growth, redefining the customer experience, and making an emotional impact – lies a latent market: Their diverse customers.

Really inspiring !

Goldenboy Media

Jaywing sets sights on Australian growth with digital and data-driven agency model

Read more

Being aware of regulations or guidlines is just the start. As our CEO Emma Lo Russo stated exactly two weeks ago at an event we supported...

Alan Smith

​Are the Wild West days of influencer collaboration over?

Read more

Rebranding is always nice solution to get better organisation. Businessman may apply certain special services (for example, https://www.l...

David Hill

CMO interview: Spearheading the global rebranding of OFX

Read more

Thank you so much for sharing this article.Top Digital Marketing company in Bangalore

Way To DM

Predictions: 17 digital marketing trends for 2017

Read more

Thanks for the great article Jodie, agree many boards and senior execs are operating in outdated modes, just as we need some reverse soci...

sharyn

Change across the board: Why boards need to digitally evolve - Data-driven marketing - CMO Australia

Read more

Latest Podcast

More podcasts

Sign in