Verizon is buying AOL for $4.4 billion. The offer of $50 per share represents a premium of 17.4 percent on AOL’s Monday close of $42.59. The deal has been rumored for months, but most people didn’t believe it because it sounded so silly.
That’s because it is silly.
The big rationale of the deal seems to be to put more ads — especially video — on your mobile devices. Either that, or Verizon wants to expand its presence in the dial-up Internet market, as that is still AOL’s primary revenue stream. The market was unimpressed, as Verizon’s share price has fallen $0.22 to $49.58 in early morning trading.
I’ll go into the details in a minute, but the bottom line is that this deal is in no-man’s land. It is not a strategic match, and it does not have the scale to impact what Verizon is really going after — Google’s dominance in Internet and mobile advertising.
A real quick reminder: AOL was worth $226 billion shortly after its disastrous merger with Time Warner in 1999. It’s now worth $4.4 billion. And to repeat: Its largest revenue stream is still dial-up Internet. Its Internet and advertising revenues are still pretty tiny.
The overall media business is dominated by two things: content and distribution (and the combination thereof). A perfect example is cable companies and the piles of money they make when they combine ownership of valuable media assets, such as sports licensing rights or hot programming, along with distribution across their networks.
Internet media is growing faster than traditional media, and the shift of platforms from broadcast and cable to over-the-top (OTT), mobile, and Internet has opened up distribution channels to more competition. This has been demonstrated by the value created by Netflix (Nasdaq: NFLX) by distributing content using Internet broadband. Netflix has also driven toward vertical integration by developing its own programming
So, the theory is that Verizon has this idea that by buying AOL, it hopes to integrate its mobile distribution network (more than 30 million mobile phone subscribers) with AOL’s content and advertising technology and become more of a player in mobile Internet content and advertising.
Buying AOL is an unimpressive solution. AOL does not have the Internet content scale, technology differentiation, or leverage to make a dent in Google’s dominance. It’s not going to work, and here’s why:
Minimal technology leverage. What is Verizon’s leverage in mobile devices? None. Apple and Google control the operating systems on mobile devices, with roughly 90% of the market between them. All Verizon does is sell the devices, which means zero leverage. It doesn’t control the technology at all.
Me-too video ad technology. I saw a pundit on TV say this was about AOL’s programmatic video ad technology. That’s preposterous. There are dozens of video-ad technology companies. Yahoo recently bought one of the best, BrightRoll, for $640 million. So if Verizon were really interested in video ad technology, why wouldn’t it buy a video ad technology company?
Wrong culture. This is Time Warner/AOL all over again — on a smaller scale. Zero cultural fit. Verizon is a global telecom player. It’s trying to jump into the content and advertising business, with much bigger players such as Google, Disney, Yahoo, and Viacom. Have you ever hung out with telecom executives? They are in the business of putting cables in the ground, not creating exciting content.
AOL’s content and advertising share is negligible. AOL is a tiny content and advertising player. Google controls nearly $20 billion in online ad revenues. AOL controls about $1 billion. How will that give Verizon any scale to take on the giant?
This is about Verizon’s paranoia about the threat of OTT Internet content and the threat of cable, more than anything else. If you think about it, it’s being squeezed on both sides: Netflix and Google are squeezing it on content and advertising, and cable companies are squeezing it on the distribution side.
AOL CEO Tim Armstrong this morning defended his track record at AOL, which he refocused on Internet content by buying assets such as The Huffington Post and TechCrunch.
“If you look at AOL over the last five years… we turned the company around,” he said on CNBC this morning after the deal was announced. “We outperformed the S&P 500 for the last five years, and when you look at where we are today and where we’re going, we’ve made AOL as big as it can possibly be in today’s landscape.”
Armstrong has probably gotten as far as he could refashioning AOL as an Internet content company bolted on to Steve Case’s old dial-up business. He’s done well for AOL shareholders in the last five years, which he should be commended for.
Armstrong is a great salesman, as he has just made a deal to sell Verizon a company for $4.4 billion that will have minimal impact on its ability to compete on advertising and mobile video.