Editor’s note: So why did telecommunications giant Verizon decide to buy AOL for $4.4 billion? Technology Business Research analyst Seth Ulinski sees multiple reasons for the decision. He explains those to WTW Insiders.
HAMPTON, N.H. – AOL opens doors to high-growth ad tech and digital advertising markets for Verizon.
Verizon continues to evaluate adjacent markets in which it can parlay its Internet and mobile businesses as customers cut the cable cord and turn to digital for media consumption. By acquiring AOL, the company enters two high-growth markets historically dominated by the likes of Facebook and Google: digital advertising and advertising technology (ad tech).
Though intertwined, the worlds of digital advertising and ad tech represent separate opportunities and new business lines for Verizon. AOL media properties such as Huffington Post and TechCrunch capture revenue in the form of advertising, while AOL’s suite of ad tech (ONE) provides underlying technology to deliver advertising. TBR estimates the digital ad market will surpass $150 billion in 2015, reaching $300 billion in 2020; the ad tech market will grow from $30 billion in 2015 to $100 billion by 2020.
Ad tech is king, not content
When Tim Armstrong took the reigns as CEO of AOL in 2009, he envisioned creating a premium content company. However, by 2013 Armstrong changed course, seeking to transform AOL into a technology company. This was largely driven by the rise in programmatic media buying and selling platforms, leveraging algorithms and big data. A full-suite ad tech stack would trump the value of content value in this new ecosystem. As a result, AOL spent over $550 million on three major acquisitions:
- Adap.tv $405 million, Aug. 2013 — programmatic video buying and selling platform
- Convertro $101 million, May 2014 — cross-channel advertising attribution platform
- Vidible $50 million, Dec. 2014 — video content management and syndication platform
While Adap.tv and Vidible align with Verizon’s quest for owning video delivery platforms, Convertro should add value to Verizon’s Precision Insights business unit, helping marketers better understand online campaign effectiveness, including their impact on offline sales.
Why sell now?
Given AOL’s recent transition into a technology-led organization and a handful of sizable acquisitions, it begs the question as to why the company would sell. TBR believes a fragmented and highly competitive ad tech market is one major factor. There are a number of formidable competitors in areas where AOL does business, including video specialists (e.g., TubeMogul, SpotXchange and Videology) and multichannel platforms that support video formats (e.g., Turn, DataXu, The Trade Desk). Meanwhile, independent attribution vendors such as C3Metrics, VisualIQ and MarketShare likely pointed out the potential conflict of interest given AOL’s ownership of media properties. By joining Verizon, AOL gains access to greater resources and timing may be right to shed its Web properties.
AOL business carries synergies, as well as questions
Fusing disparate platforms: Weaving together Internet connectivity and ad tech will prove a difficult task; the content ownership component carries further complexity. Fortunately, Verizon has a history of executing technology acquisitions, and TBR believes this will serve the company well considering the AOL acquisition is a massive undertaking.
AOL delivery model still in transition: While AOL focused on becoming a technology company the past three years, only 45% of global ad revenues were driven through programmatic ad tech as of 1Q15. This indicates the company still relies on media buying and selling processes that have not been automated. TBR does not believe Verizon will employ a dedicated media sales team unless content ownership is part of the long-term strategy, which will require additional investments.
Marketing precision (and privacy concerns): The marriage of Verizon’s broadband and cellular subscriber bases with AOL ad tech and content presents tremendous opportunities for marketers and agencies from an audience reach, targeting and measurement standpoint. However, the new entity will have to be mindful of giving consumers notice and choice. Leveraging personally identifiable information (PII) without doing so could be disastrous. Verizon Wireless and AT&T received backlash and subsequently shuttered “zombie cookie” initiatives that sought to address the challenge in measurement and attribution of ad campaigns across mobile devices.
Verizon has experience on its side, but faces competition from multiple angles
Verizon benefits from previous tech acquisitions, as well as investment in ad tech. Verizon’s venture capital arm, Verizon Ventures, invests in advertising, mobile and enterprise tech companies. Recent investments by Verizon Ventures included a $1.5 million investment in RUN, a programmatic media buying and data management platform. RUN was acquired by Publicis for an estimated $70 million in 4Q14. TBR believes this afforded Verizon an understanding of nuances within programmatic ad tech, including growth and profitability.
While continued investment in mobile and video ad tech platforms is certain, the question remains whether Verizon will pursue content ownership, historically a people-intensive business, or focus on infrastructure and delivery platforms. A case can be made for owning as much of the value chain as possible. TBR believes AT&T is weighing similar paths, actively investing in digital video platforms through Otter Media, its joint venture with The Chernin Group. Meanwhile, cable operators such as Comcast need to keep pace with new digital content delivery models. This means whichever course Verizon pursues, it will face competition from telco operators, cable companies and digital natives.