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Here's Why Verizon Is Spending $4.4 Billion to Get in the Content Game

By Daniel B. Kline - May 12, 2015 at 5:20PM

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It's about well-known digital brand names and the company's ad technology.

Verizon (VZ -1.00%) has made a $4.4 billion deal to acquire AOL (NYSE: AOL) in a move designed to bolster the company's content offerings and over-the-top video efforts.

In what the company called "another significant step in building digital and video platforms to drive future growth," Verizon agreed to pay $50 per share for the company which got its start selling dial-up Internet access. Now, while AOL still has over 2.1 million customers paying for dial-up access, according to its most recent quarterly earnings report it makes most of its money through advertising which Verizon should be able to build on.

"AOL grew its consumer base strongly and saw continued strength in video, mobile and programmatic advertising, while we also updated the structure and capabilities of the company," said AOL CEO Tim Armstrong in the earnings release. "AOL continues to grow in strength and we are on a mission to scale the first Media Technology company of the Internet and mobile age."

The purchase will give Verizon content platforms including AOL.com, Huffington Post, and TechCrunch and a strong advertising-sales business. The deal helps Verizon transform from a services company to a more diverse brand which controls highly viewed content. That's a model Comcast (CMCSA -2.73%) has used where the company leverages its content to platforms to create more value for its cable and broadband customers.

AOL is not NBC or even Comcast's cable networks, but it is still a huge Internet platform that reaches hundreds of millions of users through its various brands, all of whom could in theory be marketed Verizon services. It's also a company with highly advanced ad technology which only gets stronger if this deal can bring more eyeballs to screens.

Verizon announced the deal on its company Twitter. Source: Verizon

What Verizon is saying
Verizon made it very clear in the press release announcing the deal that it would use AOL to " further drive its LTE wireless video and OTT (over-the-top video) strategy." Basically, the purchase gives the company content to serve to its smartphone and broadband customers. The release also acknowledged AOL's content and advertising assets:

AOL is a leader in the digital content and advertising platforms space, and the combination of Verizon and AOL creates a scaled, mobile-first platform offering directly targeted at what eMarketer estimates is a nearly $600 billion global advertising industry. AOL's key assets include its subscription business; its premium portfolio of global content brands, including The Huffington Post, TechCrunch, Engadget, MAKERS and AOL.com, as well as its millennial-focused OTT, Emmy-nominated original video content; and its programmatic advertising platforms.

AOL has built an impressive network of digital content and Verizon has a subscriber base to consume those offerings. This deal keeps the wireless company from having to create content from scratch or acquire a number of smaller players.

"Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform," said Verizon CEO Lowell McAdam. "This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."

McAdam also note the opportunities the purchase creates in the ad sales space.

"At Verizon, we've been strategically investing in emerging technology, including Verizon Digital Media Services and OTT, that taps into the market shift to digital content and advertising," he said. "AOL's advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams."

$4 billion is the price of admission
Verizon has been a pure service play in a market where owning content has become increasingly more valuable. In addition, this purchase helps diversify the company bringing it into an entirely new area that's a logical addition to the wireless phone and broadband markets the company already serves.

This is a much more measured play than buying a broadcast network or a family of cable channels. It's essentially a toe into the content and ad sales waters, but it's a big step with an established player which owns some digital franchises.

This isn't a transformative deal like AT&T (T -0.81%) buying DirecTV (DTV.DL) but it is a smart way for Verizon to enter a market it needed to be in without having to build it from the ground up. The wireless and broadband provider should be able to extend the reach of the AOL brands it will be acquiring and AOL's ad technology should make those efforts monetizable.

Verizon has made smart buy here picking up a company with an array of exploitable assets which enhance its existing service portfolio.

 

Daniel Kline has no position in any stocks mentioned. He used AOL dial-up back when that was basically the only choice. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$45.34 (-1.00%) $0.46
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.42 (-0.81%) $0.15
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$39.26 (-2.73%) $-1.10
Apple Inc. Stock Quote
Apple Inc.
AAPL
$174.55 (0.88%) $1.52
DIRECTV, LLC Stock Quote
DIRECTV, LLC
DTV.DL
Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$43.99 (-0.92%) $0.41

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