Verizon Wireless (NYSE: VZ) will employ an advertising-based model for its planned over-the-top mobile video service, which a top executive at the carrier predicted could become a multibillion-dollar business over time. And that's the major reason why Verizon Communications just spent $4.4 billion to buy AOL.
Verizon plans to launch the OTT video service this summer. The company will continue to offer on-demand video offerings that count against customers' data buckets, and Verizon will, over time, transmit more video content using LTE Broadcast technology (which Verizon calls LTE Multicast), mainly for live sporting events.
The carrier's third business model for video will let Verizon monetize video content via targeted advertising. "People will enjoy that product and they won't necessarily enjoy that through their data bundle," Verizon Communications CFO Fran Shammo said during an appearance at the J.P. Morgan Global Technology, Media and Telecom Conference.
Shammo noted that in some ways the video product will be similar to sponsored data plans, but at its heart it will be advertising-based. Verizon has spent the past few years building and buying video assets, including the content delivery network, EdgeCast Networks and the OnCue interactive TV platform from Intel.
"The piece that we were missing was the ability to have an ad-tech platform to insert the advertising," Shammo noted. He said that when Verizon surveyed the market, it felt that AOL had one of the best-in-class ad-tech platforms available.
Shammo said that the AOL business will be a "growth business" that will be run basically independently from Verizon's main telecommunications business, just as Verizon Wireless was in its early years. AOL CEO Tim Armstrong will report to Marni Walden, EVP and president of products and new business innovation at Verizon, according to Shammo.
"This is a multibillion-dollar business for us from an advertising standpoint," Shammo said. He added that Verizon will be disclosing more details in the near future as the OTT video launch approaches. Shammo said he "will wait for Marni to take the victory lap" but that advertising will be just one component of the OTT video strategy and that there will be a much bigger "umbrella" of services for the video offering.
In terms of the content that the OTT play will offer, Shammo said it would be "different" content and not necessarily new content. In April Verizon struck deals with ESPN, CBS Sports and several other college-sports-focused platforms, and before that it licensed content from Viacom, as well as YouTube programming network AwesomenessTV.
"Everyone is focused on taking content from inside the home to outside the home," Shammo said, but that means the customer needs to have a linear TV subscription. Instead, Verizon is "going for rights of content outside the home that has nothing to do with inside the home," Shammo added.
"If you want to take it to your home you can, but you don't need to own anything" in terms of a linear TV subscription. The service will be focused on live events, sports, news, AwesomenessTV content and even video content from the AOL property The Huffington Post, Shammo said, an indication that Verizon is not going to jettison that property.
In terms of other topics, Shammo also discussed Verizon's growing use of small cells to densify its network. He noted that it used to be cheaper to purchase spectrum to add capacity to a network, but he said the AWS-3 spectrum auction changed that equation. The record-breaking auction produced $44.9 billion in gross winning bids and Verizon spent $10.4 billion to acquire airwaves. In the aftermath, Verizon "found that densifying through small cells was a much more efficient way to create capacity," Shammo said.
Shammo noted that Verizon leases a great deal of fiber today and does not need to own or build all of the small cells or Distributed Antenna Systems nodes it deploys on its network. Verizon just leased 400 DAS nodes from an unnamed provider in Boston, Shammo said.
Currently, Verizon is focused on the top 50 U.S. markets for small cell deployments, with a special focus on the top 10, Shammo said. He noted that Version did not purchase AWS-3 spectrum in New York City or Chicago because prices were too high. As a result, the carrier has been focusing on deploying small cells there. Since AWS-3 spectrum won't be fully deployed for two or three years, Verizon is getting a jump now on adding capacity in a much cheaper fashion, he said.
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