Q&A: How Verizon was attracted to AOL

So Verizon has "got mail" with its planned acquisition of AOL, but isn't that a bit last century?

AOL is a very different beast to the online portal and email service provider used by 35m Americans at its peak when it acquired Time Warner* in a disastrous $183bn deal in 2000 that came to embody the tech bubble.

Amazingly, however, its subscription service, a hangover from the days of dial-up internet access, still accounts for just under a quarter of total revenues, or just over $600m annually. It is money for nothing for AOL - almost all those customers must be paying their telecoms or cable company for broadband access.

Verizon surely is not doing this deal to target a generation of grandparents who have forgotten to cancel a wholly unnecessary but, from AOL's point of view, highly lucrative subscription?

No it's not, this deal is all about advertising. More specifically, AOL's advertising technology platform, which embeds targeted advertisements into video and other content on AOL's own and third-party websites. The value of this portion of what is said to be a $600bn global advertising market is rising fast. So-called "programmatic advertising" in the US alone reached almost $10bn last year, a rise of 135 per cent, and is expected to jump another 50 per cent this year to just under $15bn, according to eMarketer, the consultancy. Mobile is the main component of that growth and Verizon knows the sector well - it is after all the biggest US mobile phone company.

What about AOL's stable of digital media content?

That is a good question. AOL has some big names in this area - the Huffington Post, which it bought in 2011 for $315m, and Techcrunch, which was the dominant technology blog at the time AOL bought it in 2010. It also has plenty of video channels offering advice on cooking to relationships to pets and travel, all served up with an unavoidable advert at the beginning.

That said, it remains unclear whether Verizon wants to keep hold of this part of the business. It already has content deals with media companies for its FiOs TV service and is cutting more deals for its forthcoming mobile TV offering.

So is this a done deal?

Well, it's friendly and it looks like Verizon is keen to keep Tim Armstrong, the former Google executive who has run AOL for the past six years. His skills are in the digital advertising sweetspot in which Verizon is so interested.

Some analysts are discounting the likelihood that any other bidders will try their luck - and with AOL's shares jumping 19 per cent to hover just above the $50 per share valuation price, it suggests investors do not see much chance of a counterbid. AOL's sparring partner from the early days of the internet, Yahoo, has long been considered a potential buyer, and Marissa Mayer, its chief executive, will have plenty of cash to play with once she has completed the spin-off of the $40bn stake in Alibaba.

*This article has been amended from an earlier version to clarify that the acquisition was by AOL

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