Why Verizonās AOL deal makes sense
Verizon buying AOL isnāt a complete surprise ā there were rumors of a deal back in January, but now theyāve been confirmed. But it also makes good strategic sense for Verizon as part of a broader strategy thatās been emerging for some time now.Ā
Verizonās traditional business
Verizon, of course, has its roots in a very different business ā landline and wireless telecommunications services. Those make up the vast majority of its revenues today, and its landline business has been going through an interesting transition recently (as I outlined in an earlier post), and in the landline business this means shifting the base from old copper lines to fiber. To be clear,Ā thereās growth left in this business, but itās highly dependent on the combined value proposition of broadband and pay TV.Ā
A shift in TV viewing requires a hedging strategy
However, the writing is increasingly on the wall for traditional pay TV ā disruption is coming, and this quarter marked the first time in recent memory that the major pay TV providers actually saw a decline year on year in TV subscribers:
Verizon recognizes this, and in a previous post I wrote a little about Verizonās response to this threat to the pay TV business. That response takes the form of a hedging strategy, which allows it to take advantage of the video business even if the traditional pay TV side begins to suffer. I outlined in that post a three-part strategy here (quoting now from that earlier piece):
Sell classic pay-TV services to as many of the 15 million households where FiOS is available as possible. Itās only sold about a third of those so far, and the number is creeping up pretty slowly, so though thereās growth left, Ā itās not going to be huge. Competition from cable and satellite remains fierce, so thereās incremental growth here at best. Verizon will continue to evolve the offering here to make more and more content available on more and more screens, but this will be largely a competitive differentiator rather than a source of significant revenue growth.
Sell a range of wholesale content delivery and related services to third-party content providers like HBO. This is unbounded by the FiOS footprint or even Verizonās overall broadband footprint, so it could grow significantly from where it is today, though it will always be a much smaller market than consumer video services.
Sell over-the-top video services to consumers independently Ā of the FiOS offering. This is exemplified by Redbox Instant today, but could well expand into something more. Verizon already has great relationships with all the major content providers through FiOS, and through broader licensing agreements could easily create a sort of unbundled FiOS TV offering to be sold nationwide.
AOL fits firmly in the third pillar of this strategy, but also broadens it in several ways:
It takes the over-the-top content strategy beyond video into news and other forms of content, including Huffington Post, TechCrunch, and so on (it remains to be seen how AOLās news-focused employees respond to the acquisition, especially given the strong negative reaction to Verizonās own ānewsā site a few months back)
It takes Verizon beyond subscription content and heavily into the advertising sphere, which both provides a more varied set of revenue streams around content but also offers opportunities to provide converged advertising campaigns, retargeting and other attractive elements of a multi-screen advertising platform. Itāll take time to build these linkages, but in time they could be quite powerful for advertisers (see the Cablevision ESPN dealĀ reported this week).Ā
It takes these content services beyond the Verizon brand ā though Verizon has a national brand, itās not associated directly with quality content, and though it owns FiOS and therefore a video service, itās not national. It also doesnāt have a position yet in shorter-form video content. AOL extends it into some of these new areas, and using a different brand that may be more familiar to some potential customers.
Now, the AOL brand is in some peopleās minds forever going to be associated with yesterdayās technologies (my wifeās first reaction to hearing about the deal this morning wasĀ āwhat does AOL do anymore? I just think ofĀ āYouāve Got Mailā). But the reality is that AOL remains one of the top online brands in the US in particular, and one of only a handful of companies that reaches over half the US online population with its content each month. AOL, both through its own brand and through powerful sub-brands such as Huffington Post and TechCrunch, is a much more powerful content player than Verizon on a national and especially international basis than Verizon. Yes, thereās some baggage that comes with that, but for the most part the AOL brand family is a great boost for Verizon.
Despite the strategic sense behind the deal, there are of course risks and uncertainties. There will undoubtedly be a strong culture clash between the two companies ā Verizonās an enormously conservative company in many ways, and although there are pockets of startup mentality, itās far from the norm across the company. And itās an absolutely enormous company, much closer in size to AOL Time Warner in its heyday than AOL today. It will be easy for AOL and its culture to be lost or squashed in the course of the acquisition. And although there are lots of synergies (including those described above) on paper, the devil is in the details and it will take a lot of work to identify how these pieces really come together in practice to provide value for the combined company, its customers, its advertisers, and its shareholders. However, on balance I think itās a good thing that Verizon is willing to take risks as it seeks to navigate uncertain waters in the TV and video space, and this is certainly a much bigger bet than its peer AT&Tās joint venture with Chernin around Otter Media. That, of course, could end up being brilliant or very costly.
Addendum: not just about the ad techĀ
Iām seeing a lot of people assuming that this deal is entirely about advertising and/or ad tech, and that the content side is either incidental or will be sold off down the line somewhere. However, Iām not as convinced about that, or that the content business at AOL looks the same under Verizon ownership as it did on a standalone basis. Hereās why:
Verizon is building up to the launch of an over-the-top mobile first subscription video service in the summer. Huffington Post content in particular seems like a great fit in such a service (it may well have been one of the content partners even without an acquisition). With over a hundred million of its own wireless subscribers to market such a service to, Verizon has a great new shopfront for some of the AOL content
Verizon also provides FiOS within its landline footprint, and some of AOLās video content could be a great fit there too, as part of traditional bundles, as part of Custom TV (should it survive legal challenges), or in some other form.
Verizonās insight into its own users and the 70% of Internet traffic that traverses its network at some point could also allow it to add a very important targeting layer to AOLās advertising around its own content ā the challenge for all online advertisers is how to extend their reach beyond the sites they own ā Verizon provides a significant depth of insight about users AOL could never glean itself. This goes the other way too ā Verizon can gain insight about users from the time they spend on AOLās content, even if Ā they canāt monetize that usage directly.
In short, I think AOLās content businesses have a better shot and a better role under Verizon than they did at AOL, and Iām not convinced theyāre just going to be spun off once the merger closes.
