What does Verizon want with AOL?
Verizon Communications (VZ), take note: The history of acquisitions involving AOL (AOL) could be summed up as "You've got fail."
The country's largest mobile phone operator is likely hoping that AOL's checkered past will have no lingering impact on its proposed $4.4 billion acquisition. Although much has changed since 2000, when AOL and Time Warner (TWX) joined forces in what is now widely considered among the worst mergers in corporate history, there are some similarities that could give Verizon investors pause.
Verizon's basic idea is to combine AOL's content and advertising services with its own phone and Internet services. Sound familiar? It should, given that this rationale was also a key driver in the AOL-Time Warner merger, which began to crumble soon after it was completed, thanks partly to a mass exodus of consumers from AOL's dial-up service and a backlash against the combined company's efforts to tack on additional fees and services to their cable bills.
Now, years later, a smaller AOL consists of a rough federation of content sites such as the Huffington Post, as well as mobile video and advertising services. The latter will help Verizon create more video and mobile content, a way to keep consumers hooked on its network, although it remains to be seen if the company intends to retain media properties such as HuffPo and TechCrunch.
The bigger question is whether consumers will want Verizon-sponsored content, and whether advertisers will also find it attractive. Some analysts don't believe that will be an easy connection to make.
"We don't see much synergy from combining content and a network," said Jonathan Chaplin of New Street Research in a note assessing Verizon's purchase of AOL. "We don't doubt the value of good content and AOL may have good content (but no killer content), but we would rather [Verizon] focus on the business they know -- they may have built the best wireless business on the planet -- and let investors figure out where to invest in content separately."
That echoes a general sense on Wall Street that content businesses like AOL and distribution networks such as Verizon can find more success by investing in their own niches. Netflix (NFLX), which is investing in original content such as "Orange Is the New Black," is service-agnostic, seeking to offer its shows to anyone with an Internet connection. Its rapid growth has helped push up its stock more than 70 percent this year alone.
At the same time, consumers have been clamoring for more investment and better customer service from network providers, whether those are cable operators such as Comcast (CMCSA) or Internet service providers such as Verizon's FiOS. Internet service providers have recently hit record lows with consumer satisfaction, although FiOS ranks at the top of that category, according to the American Consumer Satisfaction Index. Customers aren't all that pleased with wireless service providers because of the cost of data usage, the ACSI found.
At the same time, Verizon and other wireless service providers face a saturated market in the U.S., with almost everyone who wants a mobile phone already owning one. With growth slowing, the mobile carriers are seeking new ways to make money. For Verizon, that means selling advertising, data and content.
Verizon has already quietly pushed into the arena through the acquisition of OnCue, an online pay-TV service created by chipmaker Intel (INTC). It's not exactly a household name because Verizon is still working on rolling out the service, with Verizon CEO Lowell McAdam pegging OnCue's debut for mid-2015.
But content isn't the end-all for Verizon. According to Verizon operations president John Stratton, who spoke today at an investor conference, AOL's advertising platform was a major draw.
"For us, the principal interest was around the ad tech platform that [AOL chief executive] Tim Armstrong and his team have done a really terrific job building," Stratton said, according to a transcript provided by Verizon. "We really like the technology a lot, and we think of it as a key enabler for us as we begin to generate revenue and value above the network layer."
AOL's so-called programmatic advertising uses computer algorithms to sell ad space on websites, while also gathering data on consumers' browsing habits and helping match up advertisers with potential customers. That's appealing to Verizon, which is increasingly delivering video and ads to its customers.
Some of the rhetoric in today's announcement echoes the grandiose language from the AOL-Time Warner merger. In a memo to employees, Armstrong said the deal will build "the biggest media platform in the world" and "game-change the size and scale of AOL's opportunity."
Back in 2000, AOL CEO Steve Case said the company's merger with Time Warner would transform "the landscape of media and the Internet."
For his part, Case on Tuesday wished his former AOL colleagues success in the new venture, writing on Twitter, "Congrats to my friends @AOL. Hope merger with @Verizon will ensure brighter future (mobile etc) for company that first got America online."
Of course, there's not as much at stake in Verizon's deal as there was with Time Warner. The acquisition's $4.4 billion price tag is just a fraction of the AOL-Time Warner acquisition, which was valued at $182 billion when it was announced.
For AOL investors, the sale offers a bit of good news. Under Armstrong's leadership and focus on content and advertising, its stock had more than tripled since hitting prices as low as $12 per share in 2011. Yet while some sites such as the Huffington Post have proved popular with readers, AOL is also facing a rapidly changing landscape, with social networks such as Facebook now providing video, news content and "stickier" platforms for consumers.
Having a corporate parent with deeper pockets might be just what AOL needs to expand its advertising, data and content efforts. Whether it will end up benefiting Verizon customers remains a bigger question.