A ‘Dumb Pipe’ No More: What Verizon Wants from AOL

verizon aol

When Verizon Communications announced Tuesday that it will buy digital content distributor AOL for $4.4 billion, the wireless giant signaled that it won’t quietly watch others make money using its network. Instead of being just a “dumb pipe” — i.e., the network that is used to transfer bytes between the Internet and consumers’ cell phones — Verizon now wants to create and monetize the content carried on its networks. Also crucial to the deal is AOL’s advertising platform, which allows ads to be placed automatically on content.

The deal marks the further onset of vertical consolidation within the media and communications industry. The technology world is seeing a “disruption of the linear flow of business,” said Hemant Bhargava, professor of technology management at the University of California-Davis. “We are instead seeing the emergence of platforms — integrated systems that try to cover all pieces,” he added. “Verizon was the old player — the dumb pipe in this value chain. [It is now] looking to become more integrated and go from end to end in terms of providing value.”

According to Roger Entner, founder and lead analyst at Boston-based research and consulting firm Recon Analytics, the media and communications industry is in a state of flux. “Competitive forces are breaking down the traditional silos and the competitive deck is being completely reshuffled,” he said. “We are seeing an upheaval in a market that has traditionally been very stable.”

Bhargava and Entner shared their insights on the deal’s significance for both Verizon and the industry’s future on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Verizon may have lofty ambitions with AOL, but those alone are not sufficient to make the cut, according to Kevin Werbach, Wharton professor of legal studies and business ethics. “It’s not entirely clear what strategy the AOL acquisition is serving for Verizon Twitter ,” he said in an interview with Knowledge@Wharton. “The announcement made vague references to video and mobile, but without understanding Verizon’s vision to move beyond its current FiOS, wireline and wireless businesses, it’s hard to say where AOL could contribute.” It is also not obvious as to what assets — human or technological — Verizon gains from this deal, he added.

“We are seeing an upheaval in a market that has traditionally been very stable.” –Roger Entner

Monetizing Content

Monetizing content with advertising revenues is a big piece of what Verizon seeks with AOL. The pie it eyes is large — and only getting larger: According to research firm eMarketer, mobile ad spends will cross $64 billion in 2015, up 60% from the total last year, and will reach $158 billion by 2018. Here, Verizon could hit the ground running with AOL, even as it comes up third after Google and Facebook, which now control 70% of global mobile ad spending. It helps that Verizon has more than 108 million wireless connections and more than 21 million FiOS video, Internet and broadband subscribers.

Verizon chairman and CEO Lowell McAdam made clear what he wants in a press release announcing the AOL deal. “[The] AOL advertising platform provides a key tool for us to develop future revenue streams,” he said.

AOL’s advertising platform “is the differentiating factor here,” said Entner. He explained that it is an automated marketplace that intelligently connects advertisers and distribution channels “so that the right ads are being delivered to the right audience.” Here, Verizon’s eyes are clearly on next-generation wireless video and over-the-top video from third party content providers like Hulu, Netflix and Sling TV.

Werbach agreed that the “the best explanation” for Verizon buying AOL is the latter’s advertising technology. That could “leverage Verizon’s wealth of location data,” he said. However, he didn’t see an easy road ahead for the company. “Given the head start of Apple, Google, and Microsoft in mobile advertising, as well as the competitive and privacy concerns about Verizon’s exploitation of its position as a network operator, it will be an uphill battle for Verizon to become a leading digital advertising player.”

Trends in Consolidation

According to Bhargava, the consolidation within the industry is taking a new turn now. “Time Warner-Comcast was between two horizontal players with mostly non-overlapping markets and [they] would have become a bigger player of dumb pipes,” he said. In April, Comcast called off the proposed $45.2 billion merger with Time Warner Cable after the Federal Communications Commission said it would oppose it. The Verizon-AOL deal is a vertical consolidation, he noted, explaining that it is between a network provider and a digital content distributor. “You have to look at [the Verizon-AOL deal] as one consolidated enterprise being able to compete against other consolidated enterprises.”

“It’s not entirely clear what strategy the AOL acquisition is serving for Verizon.” –Kevin Werbach

Driving the push to consolidate is the trend of more and more people using mobile devices to access video content on the Internet, thanks to speeds approaching 50 megabits a second, Bhargava noted.

Future consolidation could also involve some load shedding. AOL has over the years bought online content providers such as TechCrunch and The Huffington Post, but the majority of the advertising it attracts is for third-party websites, Entner pointed out. That puts a question mark on the future of those publications within the combined Verizon-AOL entity, he added. “They will keep it if it makes sense; but the moment there is a division of attention and focus, the sites are probably going to be sold.” He pointed to reports that a German publisher is interested in buying The Huffington Post for $1 billion. If that sale were to happen, it would bring down the cost of the acquisition for Verizon significantly, he said.

Other acquisitions could occur up or down industry verticals, as opposed to between companies with similar business lines. “We may see Dish [Network] purchase somebody and maybe do a better job on advertising, especially with Sling TV,” said Entner. Sling TV, a subsidiary of Dish Network, is an over-the-top IPTV (Internet Protocol TV) network launched in January 2015.

Entner noted that Verizon has been known to fill gaps in its infrastructure with acquisitions, unlike a firm like AT&T that tends to form partnerships instead. Bhargava said one reason Google and Facebook are ahead of AOL in video advertising is because the companies own many more landing pages — places where ads can be distributed. Against that backdrop, he thought it possible that Verizon “goes after someone who can fill that gap for them — maybe Yahoo or someone else who is not doing that well.”

Much, however, depends on how Verizon manages to unleash the value it seeks in AOL. Werbach, for one, is not convinced of the deal’s logic. “It’s not surprising that [Verizon] would try to move up the stack toward content and advertising, or to shift the culture of the company through a major acquisition,” said Werbach. “It’s just hard to see how buying AOL does either thing in a positive enough way.”

 

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"A ‘Dumb Pipe’ No More: What Verizon Wants from AOL." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 15 May, 2015. Web. 19 November, 2017 <http://knowledge.wharton.upenn.edu/article/what-verizon-wants-from-aol/>

APA

A ‘Dumb Pipe’ No More: What Verizon Wants from AOL. Knowledge@Wharton (2015, May 15). Retrieved from http://knowledge.wharton.upenn.edu/article/what-verizon-wants-from-aol/

Chicago

"A ‘Dumb Pipe’ No More: What Verizon Wants from AOL" Knowledge@Wharton, May 15, 2015,
accessed November 19, 2017. http://knowledge.wharton.upenn.edu/article/what-verizon-wants-from-aol/


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.