Verizon is buying AOL for its video content and ad technology

1. Verizon will buy AOL for $4.4 billion, or $50 a share, the company announced Tuesday morning.
2. That's a significant premium over AOL's current price, and its stock rose 17 percent on the announcement.
3. AOL is best-known for its content brands, including the Huffington Post and TechCrunch, and the PR around the deal emphasizes content.
4. But savvy industry observers think Verizon is more interested in AOL's smaller but fast-growing ad technology business.

AOL/Verizon as a content play

Announcing the deal, Verizon said the acquisition "further drives its LTE wireless video and OTT (over-the-top video) strategy."

Un-jargoned, that means video that Verizon Wireless subscribers can access on their phones, and streaming video that cord-cutting Verizon wired Internet (via DSL or Fios) can watch without a cable television subscription.

Similarly, in a memo to staff, AOL CEO Tim Armstrong wrote that "Verizon will propel AOL and comes to the table with over 100 million mobile consumers, content deals with the likes of the NFL, and a meaningful strategy in mobile video."

On that account, this is basically a content acquisition. AOL's portfolio of media brands — which includes the Huffington Post and other things that don't have AOL logos slapped on them — produce videos that could be delivered to Verizon customers through Verizon's infrastructure, allowing Verizon to either charge a premium relative to competitors or extract extra value through ad sales.

This is a lot to pay for content

Verizon making a content deal makes some sense. But the price paid here seems awfully high. As a professional content man myself, I don't want to devalue what content brings to the table. But the price offered here is more than the *combined* valuation of BuzzFeed and the New York Times, which sounds like a much more formidable content portfolio.

That said, one asset AOL brings to the table that no other media company has is its ridiculous legacy dial-up business. There is absolutely no point to buying dial-up internet from AOL, but a cohort of confused individuals do it anyway, and this brings in profits. Given the nonexistent growth potential in this business, nobody is going to buy AOL because of the subscriptions, but from a valuation point of view the revenue is real, which means you have to pay for it.

That explains some of the premium here, but it's still a bit fishy.

The deal could be about ad technology

The answer to the riddle probably lies in something the press releases didn't really deal with: AOL's growing ad tech business, which lets advertisers automate ad buying and distribution.

If Verizon could integrate really good mobile ad targeting technology with its wireless infrastructure, it could conceivably gain a huge leg up on the competition. In effect, Verizon would derive more revenue from a Verizon subscriber than AT&T draws from an AT&T subscriber. That would let Verizon undercut rivals on price and create a flywheel where the growing size of Verizon's customer base increases the value of its ad platform, which makes it economical to drive further aggressive expansion of the mobile business.

There are a bunch of ways that could go wrong, but I could see talking myself into it.

More deals could be in the works

If Verizon isn't that interested in AOL's content brands, that of course raises questions about their ultimate disposition. Kara Swisher reports for Re/Code that the German publishing company Axel Springer is in talks to buy the Huffington Post for $1 billion, and in an interview with Re/Code, AOL's Armstrong alluded to potential future sales of some elements of AOL's content business.

"We've spoken to partners about content and scaling," he said. "Obviously we've seen a lot of interest in the content brands we have. So over the course of the summer, stay tuned."

Will you support Vox’s explanatory journalism?

Most news outlets make their money through advertising or subscriptions. But when it comes to what we’re trying to do at Vox, there are a couple of big issues with relying on ads and subscriptions to keep the lights on:

First, advertising dollars go up and down with the economy. We often only know a few months out what our advertising revenue will be, which makes it hard to plan ahead.

Second, we’re not in the subscriptions business. Vox is here to help everyone understand the complex issues shaping the world — not just the people who can afford to pay for a subscription. We believe that’s an important part of building a more equal society. And we can’t do that if we have a paywall.

So even though advertising is still our biggest source of revenue, we also seek grants and reader support. (And no matter how our work is funded, we have strict guidelines on editorial independence.)

If you also believe that everyone deserves access to trusted high-quality information, will you make a gift to Vox today? Any amount helps.

One-Time Monthly Annual

$5/month

$10/month

$25/month

$50/month

Other

$

Yes, I'll give $5/month

Yes, I'll give $5/month

We accept credit card, Apple Pay, and Google Pay. You can also contribute via