For Verizon, AOL Is a Cheap Ticket to the Mobile Future
Business + Economy

For Verizon, AOL Is a Cheap Ticket to the Mobile Future

In so many ways, the rollercoaster story of AOL traces that of an evolving Internet, with challenges and sharp turns as technology has raced from dial-up modems to broadband -- and now, as the company’s latest twist makes clear, to mobile. That, after all, is what telecom giant Verizon’s deal to buy AOL for $50 a share, or a total of about $4.4 billion in cash, is all about: the rapid growth of mobile video.

That’s probably not what leaps to mind when you think of AOL. The company first became a household name in the ‘90s by providing dial-up service and access to a walled garden of content and email (those of a certain age will remember being flooded with free AOL CD-ROMs and the ever-present “You’ve Got Mail!” alert). It then became synonymous with the dotcom bust and with one of the worst mergers in corporate history, its $165 billion tie-up with Time Warner.

AOL’s subscriber growth may have continued past the end of the dotcom boom, surpassing 25 million at its peak. By the end of the ‘90s, Internet frenzy took the air out of its lofty stock -- the shift to broadband left its subscriber base dwindling and the doomed merger ultimately left AOL spun off from Time Warner and forced to find a new path on its own.

Related: Why Verizon’s $.4. Billion AOL Buy Is a Bad Move

Amazingly, though, AOL even now has more than 2 million subscribers paying an average of about $20 a month, and while the company generates most of its revenue from advertising, its “Membership” business, which includes those subscribers, continues to be the source of the company’s profits.

Under CEO Tim Armstrong, AOL has funneled that stream of subscription money into areas where it hoped to find growth, transforming itself into a digital media player that’s now best known to users as home to The Huffington Post, TechCrunch, Engadget and other content properties. If those sites are the consumer faces of AOL, they’re not why Verizon was interested in the business; some reports and a number of analysts suggest that The Huffington Post will be sold off or made part of a joint venture with a more traditional media company.

Instead, Verizon is buying AOL primarily for its “programmatic” advertising technology platform, which automatically matches advertisers with media clients. That business, which AOL built up through the $418 million purchase of the exchange in 2013, is growing both at AOL and in general. AOL’s “Platforms” business posted a $9.8 million loss last year, but it saw revenue grow by 37 percent compared with a decline of 3 percent for the company’s “Brand” group, including HuffPo and the like.

The advertising technology could play a critical part in Verizon’s own nascent plans to compete in mobile content. “Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform,” John Stratton, Verizon’s president of operations, said at an investor conference Tuesday, according to The Wall Street Journal.

The explosion in wireless subscribers and the shift of those subscribers to smartphones is essentially complete, meaning that carriers like Verizon and AT&T have to look for new avenues for growth. They’re betting that mobile video — and the advertising that goes with it — will be the answer. Verizon is already preparing to launch its own so-called over-the-top video service later this year — television programming served up over the Internet — and expanding its selection of video offerings will be necessary if it’s really going to compete in an already crowded field.

The goal is to be able to move past just providing the network that customers rely on to access mobile video and other content in order to get more money from users (read: you). That could be through advertising, like the platform AOL provides, or through offering subscriptions and charging fees for specific content, like NFL games or highlights. “AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams,” Verizon CEO Lowell McAdam said in a buzzword-laden statement announcing the deal.

Related: AT&T profit beats Street estimates, fewer subscribers defect

Still, Verizon isn’t buying itself much more than a chance to maybe compete with Google, Facebook, Yahoo and other ad tech players, in addition to AT&T and fellow wireless carriers. Just what its video strategy will be and how it will play out remains unclear, including, reportedly, to some Wall Street analysts who were briefed on it recently.

Verizon may see an opportunity to build on AOL’s ad platform and make it even more appealing to advertisers by pairing it with the massive amounts of data it has from its own broadband network. Plus, the cost of the deal wasn’t very high, certainly not when compared with AT&T’s $49 billion bid to acquire satellite TV provider DirecTV. Verizon has a market cap of more than $200 billion, and the $4.4 billion it’s paying for AOL is just over a third of its $12 billion in profits last year and a much smaller fraction of its $127 billion in revenue.

Even if Verizon is overpaying, it isn’t that huge a gamble for a company trying to secure itself a place in the rapidly changing Internet landscape.

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