Verizon Communications (NYSE:VZ) might acquire mobile ad network Millennial Media (UNKNOWN:MM.DL) for $300 million soon, according to a recent TechCrunch report. If that's true, it would represent a significant premium over Millennial's current market cap of $259 million.
When Millennial Media went public in March 2012, the stock doubled from its IPO price of $13 to $26 on the first day. However, the stock now trades for less than $2, due to a streak of earnings misses and intense competition from bigger rivals like Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) AdMob, Facebook's (NASDAQ:FB) Audience Network, and Apple's iAd. All these platforms deliver cross-device ads to mobile apps.
Why would Verizon buy Millennial?
To understand why Verizon might buy Millennial, we should discuss its growing interest in advertising. When Verizon bought AOL for $4.4 billion earlier this year, it claimed that the acquisition would boost its top line with advertising revenues. However, AOL controlled just 2.1% of the entire U.S. digital ad market in 2014, according to eMarketer, versus 38.2% for Google and 17.4% for Facebook (NASDAQ:FB).
But two months before the acquisition, AOL launched One, an all-in-one advertising platform which lets advertisers optimize their campaigns across multiple channels like display, video, and TV ads. The platform is "programmatic," meaning that it automates ads sales to the highest bidder. This meant that AOL could help Verizon scale its ads across multiple platforms, like its upcoming streaming TV service. Verizon already has experience delivering video -- its FiOS TV service reaches over five million U.S. households, and it partnered with the NFL to let users stream games to their mobile devices.
In late June, Microsoft (NASDAQ:MSFT) handed its display ad business to AOL, in exchange for a 10-year deal for replacing Google with Bing as its default search engine. However, that's a shrinking business -- eMarketer forecasts that Microsoft's share of the U.S. display ad market will decline from 3.9% to 1.7% between 2013 and 2015.
What Millennial brings to the table
In a nutshell, Verizon now owns several small advertising businesses which aren't fully integrated with each other. That's where Millennial Media comes in -- its network reaches over 670 million unique users monthly, and it has the potential to deliver ads to over 65,000 apps.
Last year, Millennial acquired programmatic mobile ad exchange Nexage. Nexage's real-time bidding software automates purchases of mobile ads -- a feature which many other mobile ad networks already offer. Millennial's annual revenue has risen every year since it went public, but its losses continue to widen. It posted a net loss of $149 million last year, as operating expenses soared 122% annually to $265 million. Millennial expects those costs to rise "significantly in the foreseeable future."
Those numbers don't look good, but it's Millennial's ability to deliver ads into apps through an automated, real-time exchange which makes it a tempting purchase. If Verizon can bundle AOL One and Millennial's programmatic platforms together, it can offer advertisers all-in-one plans for advertising across mobile apps, PC screens, and TVs. If Verizon then blends data from its wireless customers, AOL, and Millennial into a single database, it could craft powerful targeted ads like Facebook and Google.
A long-term play
Verizon's advertising business has growth potential, but the parts are still small and disconnected. Moreover, the Internet advertising market is quickly becoming a duopoly between Facebook, the largest social network in the world, and Google, the largest search engine.
Verizon could leverage its position as the largest wireless carrier in the U.S. to attract advertisers, but it must consolidate its fragmented portfolio of advertising platforms first. But once Verizon creates a scalable advertising platform across multiple screens and services, it could gain a unique advantage against Facebook and Google. Acquiring Millennial Media could help it accomplish that goal.
Leo Sun owns shares of Apple, Facebook, and Verizon Communications. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Verizon Communications. The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.