Why is Verizon Buying AOL?

Why is Verizon Buying AOL?

Updated 5.21.2015
Full disclosure, the author of this piece owns shares in AOL, and has for decades now. For the most part it's been dead money, but the stock is off its lows, and we bought at an early low price. That said, the announcement that Verizon [NYSE:V] was buying AOL [NYSE:AOL] didn't make a whole lot of sense here at LWRAS. Is Verizon trying to become a content provider to skirt the coming Title II regulations?

The purpose here is to round up and review the evidence and background and then analyze this proposed deal.

Throes of a dying dinosaur?

According the Wall Street journal in the article, "Verizon-AOL: A war of All against All," Verizon is buying AOL because owning the pipes isn't as valuable as it used to be, though the Journal blames the iPhone rather than Title II.

The iPhone was the moment where consumers began paying the device makers more than they paid the network. Loyalty was no longer to the network, but rather to the phone. Initially iPhones weren't offered on all networks (by Apple decree) and so the anointed network gained new customers— new expensive customers who required a lot of bandwidth and speed for data transmission.

More recently, content providers Google and Facebook are laying fiber, and cable companies are building wifi networks. Network competition has never been greater. So Verizon buys AOL's clutter of content properties for $4.4 billion as a way to remain relevant in the changing market.

Time will tell if this mega-merger with AOL will work out better than the last one with Time Warner. Further disclosure: after the break up of that debacle, we wound up with Time Warner shares too.

Verizon will own HuffPo

AOL purchased Arianna Huffington's website a few years back, thus Verizon will become the HuffPo's new owner. Not everyone at the HuffPo is happy about this. The author, Bruce Kushnick, is apparently a long time, vocal critic of Verizon. Kushnick's three reasons why the deal should not be permitted are that Verizon has a monopoly in phone line in the NE; spending on content development will take away from network upgrades; and third Verizon vertically integrates its services doesn't play nice with other peoples content. That last sounds like an issue for regulators.

Kushnick thinks that for the deal to go through Verizon should be make to divest its network of pipes. This seems an unlikely outcome. Verizon has not lived up to the promises it made when competing for the licenses to build its networks, therefore there is no reason to think it will keep any promises made related to this deal. .

Verizon wants people to watch its video on their phones

Video is a data hog, but if Verizon has its own videos that its phone customers watch then they can close the circle on revenues. They get fees for data usage and they get the ad revenues when the videos are watched. So this reasoning is that Verizon wanted AOL's (HuffPo's) content. In this analysis, its all about mobile users and the ad money that can be made from them.

The deal would let AOL track users

AOL has bet its future on ad revenues, but they would like a means to know (as Facebook does) who is accessing its content. Verizon mobile users will provide that. Cookies don't get the job done because they don't span multiple devices. AOL's Bob Lord insists that the content properties are not for sale, whatever Kushnick desires.

Net neutrality concerns

Gizmodo thinks the deal is a way for Verizon to skirt the Title II regulations as posited above. The new rules will not let Verizon treat content preferentially, but if the content is part of their service, then they have an excuse to put that content in front of users first. They would need to allow users to choose to go elsewhere, but odds are a large percentage will simply use what's in front of them. Gizmodo wants the rules to be written to disallow any type of end run around net neutrality.

AOL still makes money from subscribers

This surprising fact is derived from the companies SEC filings. Though subscriber revenues has declined, it is still a significant portion of the company's revenues.

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Updated 5.21.2015
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