Verizon deal to buy AOL continues media consolidation

Verizon deal to buy AOL continues media consolidation
On Tuesday Verizon announced its $4.4 billion deal to buy AOL. (Andrew Gombert / EPA)

A year ago, when telephone giant AT&T unveiled its $49-billion deal to buy satellite TV company DirecTV, the industry asked:

What about Verizon?


On Tuesday, Verizon responded: You've got mail! The telecommunications company announced its $4.4 billion deal to buy AOL, a service that started life as the leading dial-up Internet service, was involved in the most disastrous media merger in history, and eventually became the butt of tech jokes when consumers switched to high-speed Internet service.

Since being spun off from Time Warner, AOL has been on a mission to reinvent itself as a leader in digital content, video and advertising.

Many people learned Tuesday's merger news on their smartphones, which underscores what Verizon's acquisition of AOL is about.

"The key to the deal is the boom in mobile access," Sarah Kahn, an analyst with IBIS World, wrote in a report Tuesday. "Over the past five years, consumers have come to perceive on-the-go Internet access as essential."

Nearly two-thirds of Americans use a smartphone. Last year, Internet use on mobile devices exceeded the use of the Internet on computers. Mobile advertising is one of the fastest growing segments of advertising.

Last year, nearly $43 billion was spent on mobile advertising worldwide and is expected to increase 61% to reach $68.7 billion in 2015, according to eMarketer. Google dominates with a 38% share.

In the U.S., AOL claimed just a 2% marketshare of the larger $50.7 billion digital advertising pie, down slightly from its 2.3% share in 2013.

But explosive growth is coming in the realm of programmatic advertising, which basically turns over ad-buying decisions to software programs. This segment increased 135% to nearly $10 billion last year, according to eMarketer.

Programmatic advertising in 2015 is expected to grow an additional 49% to reach nearly $15 billion -- or more than half of all digital display advertising.

AT&T wanted DirecTV because the El Segundo pay-TV company has nearly 20 million customers and is a leader in providing premium content -- i.e. established TV channels. That deal is expected to be approved by federal regulators in the coming weeks.

The consolidation trend continues with Verizon's embrace of AOL, which also must be approved by federal regulators.

The AOL acquisition is much different from AT&T's planned purchase of DirecTV although both transactions are about consolidating competitors, strengthening ties to consumers -- and increasing revenue.

"AOL’s platforms segment is already well positioned to address cross-screen digital media advertising trends," said Kahn, the IBIS World analyst. "The company offers a range of advertising technology products and services to advertisers, publishers and other technology companies individually or on a bundled basis."

In other words, AOL knows how to automate the process of ad planning and buying by using programs that match advertisers and content publishers. 

"Ultimately, the [AOL] purchase will help Verizon—which owns about a third of the wireless market—to expand its mobile-video offerings, retain customers and attract new ones from its competitors," Kahn said.

Wall Street research firm MoffettNathanson pointed out that the AOL of old is certainly not the AOL that exists today.

"AOL is a tantalizing first step towards creating a mobile advertising platform that is truly unique," Craig Moffett and Michael Nathanson wrote in a note distributed after the Verizon deal was announced.

"AOL has successfully built a robust ad tech stack with assets across mobile, social, video and programmatic for both advertisers and publishers," they said. "It has premium audience measurement and attribution capabilities, as well as content creation and distribution technologies."

Yup, instead of Mad Men, we have entered the Autobot age of advertising.

Big Data increasingly is the motherlode for media and advertising companies.

The move raises alarm bells in some quarters precisely because of all of the personal information that search engines like Google, social media sites like Facebook, phone providers like AT&T and Verizon and cable TV companies are able to collect on their customers.

“Whether or not the combination of a major online advertiser with the largest mobile services provider raises substantial antitrust concerns, it raises extremely substantial and urgent privacy concerns," said Harold Feld, a senior vice president of the consumer group Public Knowledge, on Tuesday.
"Verizon has already shown an alarming tendency to harvest private information from subscribers to bolster its foray into online advertising," Feld said.
"The Verizon/AOL acquisition underscores the need for the FCC to move quickly to put basic privacy protections in place that recognize the unique and privileged access broadband providers have into our personal communications," Feld said.

Twitter: @MegJamesLAT