Media

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

How does Verizon avoid being labeled a dull, low-growth utility as the business of selling mobile phone contracts runs out of steam? By taking on Facebook and Google in digital advertising.

Out of Steam
Verizon is seeking new growth as the business of selling mobile contracts loses steam
Source: Bloomberg

CEO Lowell McAdam at least deserves credit for being bold -- none of his major peers in Europe or Asia have made a similar bet, but they are watching with interest to see if it works.

So too are ad agencies. They're concerned Google and Facebook, which now account for 43 cents of every dollar spent on online ads, are turning into a powerful duopoly. They fear the duo will eventually raise prices and cut agencies out of a major growth business. At an ad industry conference in Cannes this week, executives expressed their hopes Verizon will succeed in creating a viable alternative to Google and Facebook.

Building a web video and mobile advertising empire from scratch will be a difficult task. It's made harder by the fact Verizon is starting with antique brands like AOL, which has about 500 million visitors a month compared to Facebook's 1.65 billion. It is also in the running to buy another faded web star, Yahoo.

Dominant Duo
Verizon's digital ad revenue trails that of Google or Facebook
Source: eMarketer
Estimates are for 2016

Verizon's AOL will have less than $1.4 billion of digital ad revenue in 2016, compared with $81 billion for Google and Facebook combined, according to research firm eMarketer.

But it also looks like a relatively low-stakes expansion that, if it works, could inject Verizon with some youthful vim: smartphones are becoming the main way people surf the web and watch video.

Video Star
Digital video ad sales are poised to climb in coming years
Source: eMarketer

The strategy has two parts. First, Verizon has created digital hangouts such as youth-focused mobile video service Go90 to lure people and collect tolls in the form of ads. Second, it plans to harness information on its 113 million mobile phone customers like their location to help marketers target the audiences they want, and pay Verizon for the privilege.

Verizon's $4 billion purchase of AOL last year not only gave it digital content such as the Huffington Post, but also technology to power its data-collection and ad sales efforts. A Yahoo deal would bring more scale and better tools for web video and selling ads online.

In all, Verizon has made nine acquisitions or investments in media or advertising technology firms since the start of last year, according to Bloomberg data. The company can easily afford them, as well as the $4 billion it has offered for Yahoo. Verizon is expected to generate more than $14 billion in free cash flow this year.

Given Google and Facebook's lead, success is far from assured. It's possible Verizon may be doubling down on a previous generation of advertising technology -- there's much debate about the quality of Verizon and Yahoo's technology for serving up commercials. And it's hard to see how it can match the troves of customer information Google and Facebook collect on their much larger user base.

Even so, Verizon thinks AOL will pay off. It plans to increase revenue from the business to $20 billion in 2020, up from $2.6 billion at the time of the purchase. For comparison, Verizon's sales last year were $130 billion.

With both companies trading at significantly larger multiples of earnings than boring old telcos, Verizon shareholders will be content if McAdam can grab just a little of that tech stardust.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net