Nine takeaways from the Verizon–AOL Deal
It’s easy to quickly label yesterday’s Verizon purchase of AOL as one aging utility buying another. One superannuated phone company buying a web company that’s gotten long in the tooth. Two companies of slowing revenue growth looking for updated identities and finding ways to compete with increasingly asymmetrical competition.
Those characterizations all contain truth, but provide just one view of this likely $4.4 billion transaction. Look into the kaleidoscope of the deal, and it breaks into an ever-changing array of colors. Scale, whether Verizon’s or AOL’s, both big players in their worlds, now only gets you so far, the deal tells us. In an age when audiences’ habits and loyalty prove increasingly tenuous and advertisers’ willingness to test new platforms grows, no business is stable. That shaky earth means follow-on mergers and deals are more likely to happen.
Let’s look into the prism, picking out nine compelling, short-form views:
1. Small Deal: It certifies how little value remains in a fifth- or sixth-tier digital player. Even with AOL’s steady ad-tech building, it hasn’t been able to escape that position in the digital ad rankings. Facebook, of course, is the big mover, but Google, Yahoo and Microsoft all stay comfortably ahead of it, and players like Twitter and Pandora have more mojo going. Significantly, in mobile advertising, AOL lags, though its brand-new One platform aims to catch up.
For Verizon, it’s a bolt-on, a relatively cheap pick-up of technology – ad and video – that help in the further reshaping of the company. For Tim Armstrong, it’s a fair, but small, exit.
2. Mobile: Verizon is the largest cellphone company in the U.S. And, duh, smartphones are mobile. Mobile is now both the driver of digital ad spending and audience usage, so this deal is about connecting the dots in ….. mobile. One issue, AOL lags its competition in mobile monetization and isn’t seen as a leader in mobile content, so maybe it’s an odd buy, but it’s what Verizon could obtain.
3. Data: Verizon’s got a digital ton of first-party data – the gold in the digital world – but hasn’t found great ways to use it. Almost all of it is immediately geo-located, thanks to handset GPS, which should be of great commercial value, as technologies and privacy issues sort out. AOL’s ad stack – still among the top six in the digital world – provides a better means to monetize that data. HowVerizon gets deeper into the world of selling and buying, of advertising and e-commerce will spawn a meeting industry of its own. Neither advertising nor data is in Verizon’s DNA, so marrying the two won’t be easy.
4. ARPU: A favorite metric of the cable and phone industries, as in average revenue per user. Once you’ve got a recurring, billing relationship with a customer, how do you increase the monthly take by a percentage point or three, here or there? Verizon owns 108 million wireless billing and nine million FIOS (video, Internet) customer relationships, but its overall revenue growth has been slowing. Landlines drop, TV unbundles and broadband competition may intensify. Surely, there must be a way to sell current customers more, or monetize them better, and here AOL offers potential, different means to goose ARPU.
5. Competition: Verizon competes with AT&T, we all know. Then, there’s the cable competition. Now, though, it finds itself in asymmetrical warfare. Just several years ago, the biggest, fastest-growing digital companies appeared to be in separate businesses. Google in search, Facebook in social, Apple in hardware and software, Amazon in ecommerce. Now, they batter heads, each and all redefining, and seeking to profit from, the complete disruption of buying and selling in our time. Digital advertisingitself is just one category, as such initiatives as Amazon Same-Day and Google Express drive their own blurring between product selection (less and less ad-driven), purchasing and delivery/pick-up. Verizon madly wants to find a place to play offense on this new landscape.
6. Growth: It can grow through acquiring more like businesses, as competitor AT&T’s has done, in trying to buy T-Mobile before it was blocked, and now intends to do with its DirecTV buy. Verizon needs to increase earnings, where growth is slowing.
7. Home Run: Both the companies formerly known as telecoms and those as cable companies have gotten to third base, but no one has figured out how to hit a home run. Triple Play strategies – landlines, wireless and video/Internet -- have dominated, but are now multiply challenged by everything from Google Fiber to HBO Now. OTT both offers a big headache and a potential new place to play, with AOL offering what may be an on-ramp.
8. YAHOO!: Take away its Alibaba and Yahoo Japan stakes, and Yahoo looks a lot like AOL, maybe worth 2-3X of what AOL got from Verizon. Yahoo owns a number of the same problems as AOL: sluggish growth, inability to compete successfully with Google and Facebook and uncertain consumer identity. In that sense, Yahoo is just another utility – highly useful, but lacking in the next-stage, I-know-what-this-is brand now needed. Would other pipes companies, like a Comcast, an AT&T, a Sprint, a TWC, a Cox or Charter want to move in the same direction as Verizon, betting on the nebulous future of “video” and “digital advertising?”
9. Portalitis: Does Verizon really believe it can be a media or content company? Pipes companies have been dreaming that dream for two decades now, but their lack of media know-how has repeatedly tripped them up. Selling games is one thing; becoming a media brand is quite another. Even AOL, with its gaggle of brands, is really more a hodgepodge than a media company after all these years.
Other observations: Verizon already plans a big OTT product rollout this fall. Maybe, it can leverage its significant core assets of customer relationships and handsets to get viewers to watch video, and even to pay for add-on bundles. The question, of course, is how many at what margin. While its livingroom-oriented FiOS product almost reaches 10 million households, and is growing decently, consumers are more likely look to the Netflixes, Apples and Amazons increasingly as they make try to make sense of the commercial video world.
Being a publisher – whether of HuffPost or Techcrunch or AOL’s many other products – makes far less sense. Already, Re/code hasreported that Axel Springer (Capital: “What Are They Thinking? The eight principles for transforming Axel Springer”) is in talks to buy or joint venture on Huffington Post. Of course, that’s the kind of global-reaching news product that Springer CEO Mathias Dopfner loves, like his recent 50-50 investment in Politico Europe. That’s a buy that makes much sense. Further, Dopfner is used to working with telecoms, as he continues negotiating with Deutsche Telekom for its T-Online portal.
Springer could be interested in other AOL content assets. In any case, many of those could be separately rationalized. None are big moneymakers AOL saw its own property revenue drop 4 percent to $130.5 million in the first quarter.
Topical sites may be finishing their investment gold rush. How many tech news sites can really make money? Expect consolidation in that area and many other niches that AOL has played in, as operators begin to value profits over simple audience growth.