Verizon Buys AOL For $4.4B To Bolster Video

Verizon moves into the mobile advertising space with the $4.4 billion acquisition of AOL, which also gives the company a stronger foothold in OTT video.
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Communications giant Verizon announced it is snapping up Internet and media company AOL for $4.4 billion as part of its plan to further build digital and video platforms.

Tim Armstrong, AOL's chairman and CEO, will continue to lead AOL operations after the deal closes. The transaction will take the form of a tender offer followed by a merger, with AOL becoming a wholly owned subsidiary of Verizon upon completion.

The deal is yet another strange twist of fate for AOL, which once dominated and Internet through its dial-up service. A company once powerful enough to buy Time Warner, AOL fell on hard times after the deal, while the Web changed in dramatic ways thanks to broadband and the emergence of Silicon Valley giants such as Google.

Try as it might to re-invent itself through various projects and media assets, the halcyon days of the 1990s never returned.

Still, AOL had enough assets and IP to attract a buyer, especially one hungry enough for more customers who want to keep expanding their mobile experience, especially through ubiquitous video, and those advertisers who are desperate to reach them.

"AOL has once again become a digital trailblazer, and we are excited at the prospect of charting a new course together in the digitally connected world," Lowell McAdam, Verizon chairman and CEO, wrote in a statement, after the two companies formally announced the deal on Tuesday, May 12.

"This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience," McAdam added.

Among AOL's assets are its subscription business and portfolio of content brands like The Huffington Post, TechCrunch, and Engadget.

It's All About Video

In addition to Verizon's mobile video and Over-The-Top (OTT) plans, the merger will also support and connect to the company's Internet of Things (IoT) platforms.

The concept of OTT refers to the consumer preference for watching video content on mobile devices instead of (over the top of) their home television sets.

AOL's OTT assets -- largely aimed at mobile-content hungry Millennials -- are one of the key points of the acquisition, according to report in the UK edition of Business Insider.

"Verizon is zigging while the rest of the industry is zagging. They're trying to abound the commoditization of wireless by creating something truly differentiated around video," Craig Moffett, an analyst with MoffettNathanson, told Investor's Business Daily. "It's a smart strategy."

In a 2014 survey of 23,500 executives and consumers across 43 countries, research firm IDG Global Solutions revealed a dramatic increase in mobile video consumption, with nearly three-quarters (74%) of consumers using a smartphone to watch online videos, compared with 61% in 2012.

A February study by IT research firm Gartner suggests the trend toward mobile video is only accelerating -- the company expects mobile video traffic to grow 59% this year, and predicted video streaming would account for over 60% of mobile data traffic in 2018 as consumers increase the number of videos they watch and upload.

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"They want to integrate advertising and content programming with their wireless network," Roger Entner, an analyst with Recon Analytics told Bloomberg in response to the deal. "It's an ambitious plan, the mobile advertising market is dramatically dominated by Google."

Nostalgia For 1996

The deal also brings AOL's story full circle -- albeit a circle with a much smaller diameter than when the company was able to pluck up media giant Time Warner for $164 billion in 2000.

Made on the eve of the dot-com bubble, the partnership, which was supposed to leverage AOL's Internet expertise to launch the lethargic media company, was dissolved in 2009 when Time Warner spun AOL off into a separate business entity.

In a Telegraph article in 2010, the disastrous deal was called "the biggest mistake in corporate history," by Time Warner's then-chief Jeff Bewkes.

Incredibly, AOL recently reported that 2.1 million Americans are still using its dial-up service, a nostalgia-inducing thought for many who still remember the scratchy, electronic connection noises and "You've got mail" catchphrase.

AOL's first quarter report also revealed third-party ads are continuing to boost revenues for the company, with that division growing by 19% year-over-year to $231.6 million.

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