Buying AOL is How Verizon Plans to Dominate Video

Chris Hondros/Newsmakers

Chris Hondros/Newsmakers

It’s not often that enormous corporate mergers or buyouts catch people by surprise. The Kraft-Heinz deal in March was news to many people, but it generally made sense. The two companies don’t have many competing products, and by merging have the potential to increase their market share by enormous amounts. Far more people seemed to be taken aback by Verizon’s announcement May 12 that the company was purchasing AOL and its subsidiaries for $50 per share, a deal worth a total of about $4.4 billion. It might seem like a fluke deal, but really it’s all about Verizon’s plan for expanding its expertise in video distribution — and raking in profits because of it.

At first, it could seem incredibly odd that a company known widely for its phone service would want to purchase an aging, almost-defunct company known mostly for its dial-up Internet service and other sites like The Huffington Post and TechCrunch. AOL email addresses are viewed as the equivalent of the uncool kid who sits alone in the cafeteria, while all of the Gmail-using kids share documents and hop on their calendars with the touch of a button. But in the last year or so, AOL has proven it has something to offer the companies of the world, particularly those who are in the mobile Internet industry.

Beginning in earnest during 2014, AOL has worked to build up its video capabilities. The company acquired several smaller entities that allow the company to publish and distribute videos on almost any platform, customize them to attract viewers based on their interests, and most importantly, figure out a monetization system so the company can make advertising dollars from the shared video content. Those smaller acquisitions of Gravity, Convertro, and Vidible are all mentioned in the company’s 2014 annual report.

By investing in video distribution and figuring out the best ways to make money from advertising from that, the company immediately became more valuable to a company like Verizon. The wireless company has been talking about its pending video service, set to roll out sometime this summer. The “over the top” (OTT) service essentially allows Verizon customers to view video content from a variety of services straight from their mobile phones or other devices while on Verizon’s 4G network.

Verizon is already figuring out how Internet rules will apply to this service, and is coming up with a not-yet-released pricing plan for the option to watch hours of television programming on mobile devices from anywhere with a Verizon signal. As we’ve reported before, the number of Americans able to take advantage of this service is astronomical. About 10% of Americans have a mobile device and only access the Internet through their phone plan, not another broadband connection. Even if that’s only 10% of adults, not counting children who might have a smartphone long before they’re 18, that’s still the equivalent of more than 24 million people, based on U.S. Census numbers.

Needless to say, Verizon has a huge chance to capitalize on the number of people who will likely want to watch videos on their mobile devices. Now, more than ever, is the time to get their advertising strategy right so they make the most money possible on their offerings. This is where AOL comes into play in a huge way. The company’s advertising platform is enormous, both through existing brands like The Huffington Post, TechCrunch, and MapQuest, and the videos that are hosted on those sites and AOL’s main page. Even though the company’s market cap is lower than the purchase price of $4.4 billion (it sits at $3.96 billion), the deal will likely still pay off for Verizon in big ways.

According to comScore, AOL is third in terms of video content properties, only behind Google and Facebook in terms of viewership. (AOL had 65.8 million unique video viewers in March 2015, compared to 94.6 million on Facebook and 150 million viewers on Google, mostly through YouTube.) AOL also ranks 4th in video advertising properties, reaching approximately 41.9% of the entire U.S. population in March. The company ranks just above all Google sites, which reached 32% of the U.S. population that month.

AOL’s video and advertising influence

The bottom line is that AOL is doing something right when it comes to video distribution and advertising. On its own advertising page, AOL boasts that its ads reach 96% of adults 50 years and older online. The company’s content reaches 77% of affluent adults, who spend about 16 minutes per day on AOL properties. AOL ads also reach 79% of millennials online — the most coveted generation of audience members for just about every company right now — and 47.4 million millennials are exposed to AOL advertising each month.

AOL has been so successful in these areas that Lowell McAdam, Verizon’s chairman and CEO, referred to the company as a “digital trailblazer” in a press release about the deal. He goes on, “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. AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.”

Verizon notes in its release that the advertising industry is expected to balloon to more than $592 billion worldwide in 2015, estimates from eMarketer. What’s more, the firm identifies mobile advertising as the “key driver of growth,” in the industry, with advertisers expected to spend $64.25 billion worldwide on mobile ads this year. If the deal between Verizon and AOL goes through (despite cries of possible competition), Verizon will have staked its claim on the mobile advertising market in a very serious way.

Follow Nikelle on Twitter @Nikelle_CS

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