Verizon hopes AOL will put it on front foot in mobile advertising

"A mobile phone is almost like having a cable box in your pocket," Tim Armstrong said in a recent interview. But the AOL chief executive is not your typical cable guy.

True, his company creates video series. But Mr Armstrong's focus is on advertising. And those handheld cable boxes are at the centre of a dramatic change in the way ads are sold, fuelled by floods of data and new tools for targeting messages at customers.

Verizon, the largest US telecoms group, is betting on that transformation with its proposed $4.4bn purchase of AOL. The wireless company is most interested in AOL's advertising technology, which will allow Verizon to sell more ads as people watch more videos on their mobile phones - and compete with Google and Facebook, the dominant forces in online advertising.

Since spinning off from Time Warner five years ago, AOL has remade itself from flagging internet pioneer into digital media powerhouse, with an emphasis on data-driven advertising.

Mr Armstrong, who was Google's top advertising executive before joining the company, has rolled up a number of ad tech groups, including digital video ad company Adap.tv, which he bought for $405m in 2013. Last month, the company unveiled a new platform, One by AOL, that unites those technologies into a single system.

At a time when consumers have seemingly endless choices in when and how they get news and entertainment, advertisers are keen to reach them at the right time on whatever device they are using. They are also eager to see the impact of each dollar they spend on every format.

AOL's One platform says it can meet both of those needs through "programmatic" advertising. These are technologies that use data and algorithms to place and measure ads automatically across media and devices. Programmatic spending will increase nearly 50 per cent this year to $14.9bn - representing more than half of the digital display ad market, according to eMarketer, the research firm.

The move comes as internet advertising catches up to television, long the largest slice of marketers' budgets. "This is the year when TV and web budgets are going to collide," Mr Armstrong said - and AOL wants to be the place where that collision takes place.AOL-Verizon deal

Mobile presents the next challenge. Smartphones and tablets have replaced PCs as the primary way most people get online and mobile video consumption is soaring. Content creators and advertisers alike are scrambling to keep up with consumers' changing habits.

But at $12.5bn, mobile advertising accounts for only a quarter of total internet ad revenues, according to the Internet Advertising Bureau. Mobile growth is also tied to automated ad buying: more than half of programmatic display dollars this year will be spent on mobile.

"AOL is a tantalising first step towards creating a mobile advertising platform that is truly unique," said Craig Moffett and Michael Nathanson, analysts at MoffettNathanson.

For Verizon, they suggested, tapping AOL's ad technology opens the door to generating more money from its wireless network. Even as wireless usage has nearly doubled in the last year, average revenue per user has declined about 7 per cent, MoffettNathanson said. "The strategy speaks to a possible sea change in wireless monetisation . . . By acquiring AOL, Verizon is pointing to a future where advertisers, rather than users, carry a heavier burden."

Verizon is also likely to use AOL's ad tech platform to monetise customer data in its broadband internet service, which touches 70 per cent of US internet traffic, says Anthony DiClemente, an analyst at Nomura.

AOL, in turn, will gain access to Verizon's 100m mobile customers and the telecoms group's forthcoming mobile video service aimed at younger millennial viewers. Digital video advertising, a ripe growth area for programmatic buying, is projected to increase 34 per cent to nearly $8bn this year.

"The majority of [digital] video consumption is on mobile and if you have a younger millennial audience, that skew will be quite stark, as much as 60 or 70 per cent," says Scott Button, chief executive of Unruly, a video ad tech company.

Mr Armstrong has said that AOL's investments in programmatic technologies and video will be the keys to closing the gap between the amount of time people spend with their smartphones and the amount of money advertisers devote to mobile.

"If we are going to lead, we need to lead in mobile," Mr Armstrong told staff on Tuesday.

Yet the highly personal nature of smartphones - in contrast to cable boxes or PCs - presents AOL's would-be owner with other challenges.

Verizon's advertising efforts have hit roadblocks in the past. A tracking "supercookie" used for targeted mobile ads drew an outcry from privacy advocates last year when it was revealed consumers could not opt out of being tracked. The company has since amended the programme.

"Verizon will need to tread carefully here given the privacy assumptions that most consumers and regulators will have with respect to mobile device activity," says Brian Wieser, analyst at Pivotal Research Group.

@shannonpareil

Verizon and AT&T adopt different strategies to content

Content is king. On that, Verizon and AT&T, the two largest US telecoms groups, agree, writes David Crow. But their approaches to building their video platforms could not be more different.

AT&T is trying to complete a megadeal that will radically change the profile of the company: the $48.5bn takeover of DirecTV, one of the largest US satellite television groups.

If the acquisition goes through, DirecTV would account for roughly a fifth of sales and video would become one of the combined group's main sources of revenue.

AT&T reckons that buying DirecTV will help it build a leading content group, able to distribute video over mobile, broadband and satellite. It would also provide cross-selling opportunities, not least in Latin America, where DirecTV has 18.1m customers, and where demand for pay-TV and wireless services is higher than in the US.

Verizon, meanwhile, has been charting a different course. It has been building OnCue, a long-awaited "mobile first" video platform that is due to launch this summer. This service will be delivered "over the top" of traditional pay-TV services including Verizon's existing video product, FioS.

The principle is simple: mobile-video consumption will keep customers glued to their smartphones and tablets for longer, driving up usage of its wireless network and boosting its data revenues.

So while AT&T is trying to lessen its reliance on US mobile consumers, Verizon is doubling down on them.

The acquisition of AOL is a relatively immaterial one financially for Verizon - the internet group will account for little more than 1 per cent of the telecom group's $350bn enterprise value.

However, according to Jennifer Fritzsche, an analyst at Wells Fargo, it offers "further evidence around the widening gap in the strategy" between AT&T and Verizon.

"While AT&T believes there is a greater need to own more physical infrastructure, Verizon is building up more assets to strengthen its 'mobile first' over-the-top initiative - with advertising playing a key role," adds Ms Fritzsche.

@bydavidcrow

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