Analysts: Verizon's AOL deal could help OTT video biz, but might not aid wireless

Verizon Communications' (NYSE: VZ) $4.4 billion acquisition of AOL and its advertising technology could improve the carrier's forthcoming mobile-first, over-the-top video business, but it is a risky bet in a still-developing market, according to financial analysts. The analysts see some potential benefits to the deal--but lots of reasons to doubt that it will materially improve Verizon's overall position in the market, especially in wireless.

Wells Fargo analyst Jennifer Fritzsche noted that Verizon plans to launch its OTT video service this summer focused on short-form live content. Company executive have mentioned that Verizon has several options to monetize this new service, including an advertising model, a premium subscription model or via pay-per-view.

"With the addition of AOL, VZ should be well-positioned to benefit from an advertising model in which VZ can gather valuable information for advertisers and content providers," Fritzsche wrote in a research note. "This should provide VZ a stronger bargaining position in the connected TV, mobile media and advertising sectors."

Notably, Re/code reported that AOL has been in talks to spin off its Huffington Post news business as part of the Verizon deal.

Further, Fritzsche noted that the deal offers "further evidence around the widening gap in the strategy" between AT&T (NYSE: T) and Verizon. "While T believes there is a greater need to own more physical infrastructure (through DTV), VZ is building up more assets to strengthen its 'mobile first' OTT initiative--with advertising playing a key role," she wrote.

MoffettNathanson analyst Craig Moffett praised the deal. He said Verizon is going to "skate where the puck is going to be" while AT&T is stuck in the status quo with its purchase of DirecTV (NASDAQ: DTV).

Moffett added that AOL "is a tantalizing first step towards creating a mobile advertising platform that is truly unique. AOL has successfully built a robust ad tech stack with assets across mobile, social, video, and programmatic for both advertisers and publishers. It has premium audience measurement and attribution capabilities, as well as content creation and distribution technologies. Its advertising platform, ONE by AOL, combines assets such as, a digital display advertising network, with Be On for content production and syndication, ADTECH for advanced ad management and serving capabilities, and Gravity, which layers in advanced personalization solutions."

Moffett wrote that AOL has the third largest U.S. online video content network after Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB), and the fourth largest U.S. online video advertising reach after Yahoo's BrightRoll, Specific Media, and Facebook's LiveRail.

Verizon might leverage AOL's ad tech platform to "target consumers and measure their engagement across traditional and digital video, and measure and deliver interaction across its multiple devices, platforms, and properties. That would allow for better ad serving, conversion, and ultimately attribution…and they can deliver all that across the largest wireless business in the U.S.," Moffett said.

Other analysts are less optimistic about Verizon's purchase of AOL. New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam wrote that AOL's content assets and advertising platform could bolster Verizon's efforts in OTT video following Verizon's January 2014 purchase of Intel's OnCue platform. "We doubt these content assets will take OnCue from what it is today to being a credible player in OTT, but VZ may pick up some valuable talent that, combined with VZ capital and willingness to spend, may give the effort greater momentum," they wrote. "We are not convinced the OTT business is a great business and we are certainly not assuming VZ will put together the killer offering in the space...but we remain open minded."

At the same time, the New Street analysts wrote they "don't see much synergy from combing content and a network. We don't doubt the value of good content and AOL may have good content (but no killer content), but we would rather VZ focus on the business they know--they may have built the best wireless business on the planet--and let investors figure out where to invest in content separately."

Macquarie Capital analysts Kevin Smithen, Tom White, Will Clayton and Mack Hueber are even less enthusiastic about the deal. In a research note they wrote that Verizon has "paid a hefty price of $4.4 billion for what we believe to be an unproven programmatic ad-tech platform in the nascent video ad-tech space."

They wrote that AOL "has always talked about the 'openness' of its ad-tech platform, especially relative to competing Google or Facebook products. We question whether or not AOL can market an 'open' model under VZ." It's also unclear, they added, whether Verizon Digital Media Services, the carrier's media delivery platform, will provide "the missing pieces to the puzzle to make AOL a more viable platform against larger competitors."

More broadly, the Macquarie analysts noted, the deal will constrain Verizon's financial ability to buy more wireless spectrum in advance of next year's incentive auction of 600 MHz broadcast TV spectrum. "We believe that VZ will need to purchase spectrum aggressively over the next 2-3 years in order to accommodate rising mobile video traffic," they wrote.

At bottom, they think the deal means Verizon "is showing signs of desperation as its core wireless business comes under pressure and it scrambles to find new growth drivers. While $4.4bln isn't a huge deal for VZ, it's a bet on an unproven ad-tech platform in what is still a nascent industry."

Moffett acknowledged that "there are major questions about Verizon's wireless video strategy, as well. For example, will Verizon's wireless service be "zero rated?" (i.e. where usage is exempted from monthly data allowances). If so, it could easily run afoul of the FCC's new net neutrality rules. On the other hand, if it is not zero rated, Verizon's new wireless service may struggle to compete with alternative services like Netflix or YouTube, and it will be difficult to use wireless video to truly differentiate Verizon's wireless service if anyone can use any service for the same cost."

"Whether or not they can monetize the traffic associated with wireless remains to be seen. These are not small questions," Moffett concluded. "But again, there is at least something here that is disruptive."

For more:
- see this WSJ article (sub. req.)
- see this Bloomberg article

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