AOL has spent years becoming a sprawling media and technology company, purchasing websites and smaller tech companies. The entire apparatus has now been swallowed by Verizon, which announced on Tuesday that it would pay $4.4 billion for AOL. But the country’s largest wireless carrier seems unlikely to maintain an interest in every corner of AOL’s empire. The most attractive part of AOL’s business, in fact, may be the least public of its varied properties.
Aside from its legendary CD-based dial-up Internet business, AOL's spot in the popular imagination is defined by its media businesses. AOL.com is the 41st-most-popular website in the U.S., according to Alexa.com, and AOL-owned Huffington Post ranks even higher, at 30. The company owns technology websites TechCrunch and Engadget and is one of the largest video destinations in the U.S. Verizon said in a statement that AOL's “premium portfolio of global content brands” was one of the features that make the company attractive.
Publishing tech blogs and dealing with Arianna Huffington are very different from Verizon's core area of expertise—installing cellphone towers and deciding what's an appropriate discount for a smartphone with a two-year contract. But the company wouldn't be the first telecommunications carrier to get into the content business. The media and communications industries are in a constantly pulsing cycle of acquisition and divestiture. Comcast bought NBCUniversal; AOL was once, infamously, merged with Time Warner, back when the conglomerate also owned Time Warner Cable. And given that Verizon has decided that mobile video is a major part of its future, there are some parts of AOL's business that make sense under the telco's corporate umbrella.
In a memo to AOL employees, Tim Armstrong, the company's chief executive, said he would stay on to head up a division of Verizon that would handle all of AOL’s businesses as well as Verizon ventures targeting mobile and video business. AOL employees, he said, would be kept on at their current or higher salaries, and AOL’s content businesses would benefit from larger audiences and more resources. A company spokesperson said that all of its media businesses will continue to operate under Verizon's ownership.
But there’s a fair deal of skepticism that Verizon actually wants to run a network of online publications. James McQuivey, an analyst at Forrester Research, immediately speculated that Verizon would sell off the Huffington Post. Dan Rayburn, an analyst at Frost & Sullivan, argues that the deal makes sense only as a way for Verizon to acquire AOL’s ad-serving technology: “All those media businesses AOL owns—Engadget and all that—what does Verizon want with those?”
The key to understanding what Verizon wants with AOL at all is the telco's planned mobile video service. There are various ways to make money in mobile video, but none are as tempting as video advertising, and AOL has managed to transform itself into an expert peddler of video ads.
In 2013, AOL purchased Adap.tv, a video advertising startup that specializes in automating the connections between advertisers and media companies, a process known as programmatic ad buying. Publishers provide videos they want to have advertising on, marketers hand over ads that they’d like people to see before watching whatever it is they actually want to watch, and AOL’s computers play matchmaker. This year, 28 percent of all video ads will be purchased through a system like this, according to EMarketer. By next year it will be 40 percent.
Verizon needs something like this. "The principal interest was around the ad tech platform that Tim Armstrong and his team have done a really terrific job building. We really like the technology a lot,” said John Stratton, Verizon’s executive vice president of operations, at an investor conference Tuesday. “We've talked a lot about our over-the-top video ambitions, and this is, for us, a very important cornerstone enabler as part of that broader strategy."
Whether the best way for Verizon to acquire this capability was to spend more than $4 billion on AOL is a matter of debate. But Tuesday's deal makes Armstrong's decision to spend $315 million two years ago to build a programmatic video ad business look pretty smart.