Verizon/AOL: Phone tag

Verizon is shedding mobile phone subscribers. Will easy access to the Huffington Post change the minds of subscribers thinking of leaving? On Tuesday, Verizon announced it would buy AOL for $4.4bn, all in cash, giving it access to online properties such as the Post and TechCrunch. Verizon sells infrastrucure - in wireless, television and fixed-line telephony. But it seems to worry that the connections it sells could be commoditised, and that differentiation requires content. This siren song has tempted many an infrastructure company. AOL's offering may be interesting, but for $4.4bn Verizon is getting other businesses that do not seem to fit.

Time Warner spun off AOL (which had acquired it, infamously, in 2000) in 2009. AOL then consisted of a mish-mash of digital properties as well as the original internet dial-up service, which remained highly profitable. AOL has evolved, however. Its programmatic ad unit, an automated service that helps marketers to buy digital ads on online and mobile properties (not just AOL's), recorded revenue of $280m in the first quarter. That was a year-on-year jump of a fifth, and accounted for nearly half of total AOL revenue. This unit is not profitable, however. All of AOL's cash flow comes from dial-up fees and ad revenue from its sites.

Verizon already has a partnership with the National Football League, so its wireless subscribers have exclusive access to America's most popular sport. If that does not already help retain subscribers, it is not clear why AOL content will. Regardless, it seems that Verizon is entering businesses - ad technology and charging rent to a Luddite subset of internet users - that are extraneous.

Verizon's enterprise value is $300bn. AOL will not make much difference either way - it seems unlikely that AOL can do for Verizon what YouTube did for Google, for example. Verizon will have bigger investments to make. Better to use its extra cash now to pay down its $114bn of debt.

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