With AOL purchase, Verizon now competes against Google, Facebook in ad-tech arms race

Phil Goldstein

Verizon Communications' (NYSE: VZ) $4.4 billion purchase of AOL will mean the telecommunications giant is no longer just competing directly against the likes of AT&T (NYSE: T). The deal is all about advertising technology, or ad-tech, and with it Verizon will now be competing against Google (NASDAQ: GOOG), Facebook (NASDAQ: FB) and others in the digital ad market, especially in video ads.

During the past few years, Verizon has been buying and creating different elements of a content delivery and advertising platform. Now, with the purchase of AOL, it is getting a new piece that it hopes will help it monetize its forthcoming mobile-first, over-the-top video service, which it will launch this summer. The big open question is whether Verizon can acquire enough strong video content to build an audience it can sell hyper-targeted ads against. 

Verizon's buildup to AOL started in December 2013 when Verizon Digital Media Services agreed to buy a content delivery network, EdgeCast Networks. Shortly thereafter, in January 2014, Verizon announced it would buy the OnCue interactive TV platform from Intel. Verizon has also been investing in LTE Broadcast technology to deliver video content to wide audiences, though it's unclear if its OTT video offering will make use of the technology. And Verizon already operates its Precision Market Insights division, which creates anonymous profiles of Verizon users, including its wireless users, which it sells to advertisers.

It hasn't all been rosy though; in October 2014, Verizon and Outerwall Inc. shuttered their struggling streaming video on demand service, Redbox Instant by Verizon. The AOL deal seems to indicate Verizon learned an important lesson from that shutdown: You need to have a strong business model to stand out in a crowded streaming video market. That's where AOL's ad-tech comes in.

In April, AOL unveiled One by AOL, an advertising platform that lets advertisers optimize their ad campaigns across different channels including video, display and TV. As AOL has explained, the platform "is designed to combine data, attribution, and our buying platforms to provide advertisers with predictive analytics that provide immediate insights on metrics like reach, frequency and performance, and post-campaign insights that look across all screens and formats to deliver immediate impact on relevant metrics."

With the AOL purchase, Verizon is enmeshing itself into "programmatic advertising," which is basically automated ad buying. The trick is that such ad buying is difficult on mobile, where advertisers don't have a lot of data on users and targeting cookies are unreliable (or criticized for being too invasive, as Verizon Wireless learned)

However, as AdAge notes, Verizon "owns the key to fixing this problem: concrete mobile data which can be used to tie user identity across devices." Verizon will be able to leverage AOL's ad-tech with its network to let advertisers target subscribers based on users' location and other information that can be gleaned from Verizon's own wireless and wired networks. Unlike Google and Facebook, Verizon actually owns and operates a network, and can use granular data to see when and how customers respond to ads.

John Stratton, president of operations for Verizon's wireless and wireline divisions, said at a Jefferies investor conference that AOL is "a very beautiful complement to the foundation that we have been building for several years in digital media services."

"For us, the principal interest was around the ad-tech platform that Tim Armstrong and his team have done a really terrific job building," Stratton said. "We really like the technology a lot and we think of it as a key enabler for us as we begin to generate revenue and value above the network layer. So we've talked a lot about our over-the-top video ambitions and this is for us a very important cornerstone enabler as part of that broader strategy."

The market is already shifting to more finely-tuned advertising on video platforms. For example, ESPN and Cablevision (NYSE: CVC) just struck an audience data and analytics deal that leverages the companies' first-party, census-level audience tuning data to analyze consumers' viewing habits and preferences. 

Verizon faces several challenges now that it has assembled interactive TV, CDN and ad-tech assets. The first is that compared to Google and Facebook, AOL is a small player. According to research firm eMarketer, AOL's share of the $50.73 billion U.S. digital ad market was just 2.1 percent in 2014, down slightly from 2.3 percent in 2013. Meantime, Google owned 38.2 percent of the global market last year while Facebook owned 17.4 percent. So although AOL gives Verizon solid technology it can combine with its network assets and customer data, Google and Facebook are still advertising behemoths. 

And Google and Facebook aren't standing still in the face of competition from Verizon. Google, for example, is releasing new mobile-specific ad formats aimed at people searching for cars, auto dealerships and mortgages in an effort to boost its mobile ad business.

More importantly, Verizon needs to build out its video content library. AOL On, AOL's online content library, has multiple channels like news, entertainment, style and food. It also has partnerships with Fox Sports, the New York Times, the Wall Street JournalCNET and others. But AOL's movie selection is pitiful.

And in building out that library, Verizon will be competing with the likes of Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), Hulu and others for original content and content from studios. Verizon will need an original hit or at least a wide range of programming to get and keep an audience for its OTT mobile video offering. All of the ad-tech in the world won't mean much if Verizon can't generate an audience for advertisers and get its 100 million subscribers to watch Verizon content and not just content directly from Netflix.

More broadly, Verizon's AOL deal represents a fundamental difference in strategy from AT&T. Whereas AT&T is spending $48.5 billion for DirecTV and the video delivery infrastructure that comes with it, Verizon wants to get beyond the network and make money on content and advertising against the content. AT&T is making strides in this area with its partnership with the Chernin Group to develop snack-sized video content, but Verizon is betting more heavily that it can buy and develop content and monetize that through targeted ads. Customers of Verizon Digital Media Services are likely chomping at the bit for the carrier to do just that.

Verizon's bet is not without risk, because the rewards are not immediately apparent. However, if Verizon can develop content for its OTT venture, it now has the tools to make money off of that using AOL. Now the question is whether the carrier can get the audience to show up and tune in.--Phil

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