Verizon dials up growth with AOL ad tools

"You've got mail" just became "you've got a video ad".

AOL has transformed itself since its pioneering email service was immortalised by Hollywood, but so has Verizon, whose $4.4bn bid for AOL on Tuesday revived memories of an earlier digital era.

Mobile technology is now driving the internet's evolution and Verizon is the largest US mobile operator, but it has been searching for new sources of growth as its domestic wireless market approaches saturation.

It has spent years building a mobile-first on-demand video service known as OnCue, in the hope that this will keep consumers glued to their smartphones for longer, boosting usage of its network.

OnCue - one of a host of "over the top" digital video services now competing with traditional cable and satellite subscriptions - is finally due to launch this summer. The late addition of AOL could give it the scale and technology to improve Verizon's chances of realising its growth ambitions.

Verizon made clear that its main interest lay in AOL's advertising technology platform, which helps marketers use data to buy and sell ad space, and to target their messages at the right people, at the right time and on the right screen.

AOL's advertising division has low margins but represents its fastest growing business, selling tools to serve ads next to video and other content on AOL's own sites and on other destinations across the internet. Its revenue rose 21 per cent in the first quarter of 2015, mainly on growth in sales of ads on third-party sites.

AOL-Verizon deal The business has also helped pioneer new algorithm-based "programmatic" technologies that allow marketers to target their messages, sometimes in real time. In March, AOL launched a new service that lets marketers buy and measure advertising across platforms, from social media to television, using such automated tools.

That positions it well in one of advertising's fastest growing sectors: Programmatic buying is projected to grow nearly 50 per cent this year to $14.9bn in the US, representing more than half of all digital display advertising, according to eMarketer.

Investing in original content to draw in the consumers advertisers want to reach has been the second strand of Tim Armstrong's strategy for repositioning AOL since he joined as chief executive in 2009. Such content could now help keep OnCue viewers staring at their small screens.

Verizon praised AOL's stable of content websites, including TechCrunch and the Huffington Post, which it bought four years ago in a $315m deal that earned Arianna Huffington $21m. It singled out AOL's original video content, such as Park Bench, an Emmy-award winning series of 10-minute talk shows hosted by actor Steve Buscemi.

"We doubt these content assets will take OnCue from what it is today to being a credible player in over the top, but Verizon may pick up some valuable talent that, combined with capital and a willingness to spend, may give the effort greater momentum," said Jonathan Chaplin, an analyst at New Street Research.

However, some analysts asked whether Verizon would keep all AOL's content properties. "They're non-strategic assets," said Brian Wieser, analyst at Pivotal Research Group.

A report on Re/code said AOL was in talks to sell the Huffington Post to Germany's Axel Springer, although AOL denied that Axel Springer had any involvement in the Verizon deal.

Axel Springer made an offer for all of AOL last year, according to people familiar with the situation, but it was dismissed and never considered by AOL's board. One person close to the company said a sale of the Huffington Post would be very unlikely unless the offer was significant.

Verizon is not alone in seeing video as the answer to its industry's problems. Telecoms companies are buying or building video platforms to compete with satellite and cable television operators, which are seeing consumers "cut the cord" in favour of online-only offerings such as Netflix.

According to Craig Moffett, an analyst at MoffettNathanson, the US pay-TV industry shrunk by 0.5 per cent over the past 12 months. "That may not sound dramatic, perhaps, but it's the fastest rate of decline on record," he said.

While AT&T, the second-largest US telecoms group, has responded by spending $48.5bn buying satellite operator DirecTV to expand its foothold in video, Verizon has opted to build its digital video platform almost entirely from scratch.

It has relationships with many US content owners through its existing pay-TV service, FiOs, which has 90m subscribers. Some analysts question its commitment to FiOs, however, after it sold off large chunks of the business earlier this year as part of a $10.5bn divestment.

AOL could help Verizon as it tries to build a digital-focused alternative to its current video strategy at a time when the TV and digital video markets are converging in the eyes of consumers and advertisers.

"One of the largest gushers of future opportunities for growth is the TV landscape," Mr Armstrong said last week, before the Verizon deal was announced. "The mixture of TV, video and programmatic is going to happen. In TV, we're allowing Madison Avenue to be mechanised with machines."

The Verizon-AOL deal is "a symptom of a broader trend" in the ad tech industry that has seen big companies look to monetise assets related to marketing and advertising services, said Mr Wieser, citing Oracle's $1.2bn acquisition of marketing analytics company Datalogix in January.

It may not be the last such deal, he added: "2015 will undoubtedly see many more transactions centred around ad tech involving companies not typically perceived as operating in this sector."

Additional reporting by Arash Massoudi in London

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