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Updated: 25 min 11 sec ago

Verizon is buying AOL. What now? Let us explain.

Tue, 2015-05-12 11:28

On Tuesday, Verizon announced that it had purchased AOL for $4 billion. That led to a fair bit of head scratching. 

Verizon to buy AOL. AOL still exists?

— Isobel Carr (@IsobelCarr) May 12, 2015

There were also a lot of dial-up jokes and "you've got merger"s. But seriously: why on earth would Verizon buy AOL, and what does it plan to do now that it has? Let's break it down.

What is this deal all about?

It’s about mobile video, and it’s about ads.

Like Comcast and AT&T, Verizon has realized there’s no real money in being the plumber – that is, in selling access to the pipes, whether they’re wireless phone access or Internet access to the home. The real money is in content, and unless we're talking about public radio, content means ads. AOL has really great technology for delivering ads in mobile video, and they have a lot of original content too.

Verizon has said it wants to launch a mobile TV service as soon as this summer; this is the video and the ad platform that could power it. That would put it — much like Comcast with NBCUniversal and AT&T with DirecTV — in the content business, but it would be content aimed at mobile phones and wireless subscribers instead of traditional television.

OK, but why do they need AOL for that?

It turns out, in addition to making $143 million a year off people who still pay for dial-up, AOL has also spent the past few years building itself a pretty decent little ad technology business. It bought companies like 5min media, which distributes short video clips around the web so advertisers get more views. Then it spent $400 million on an ad technology company called Adap.tv that helped it put ads on all those little video clips.

Companies like Adap.tv do something called "programmatic advertising," which basically means they use computers to buy and place ads more efficiently and hopefully more effectively. That's another story, but for now what you need to know is that AOL got itself some good programmatic ad technology, and invested in creating a bunch of content to advertise against. That made them, apparently, a tempting target for a telco looking for a new revenue stream.

Why do it now?

Well, on the wireless side, Verizon is in a price war with T-Mobile, AT&T and Sprint, not to mention prepaid providers. Wireless used to be a great business because you could basically charge whatever you wanted for data —and Verizon did. That’s changing, so it's making less money on wireless. On the broadband access side, there are the looming net neutrality regulations — if broadband and wireless internet access are reclassified as utilities, that will limit Verizon’s flexibility around what it can charge for access. The telcos are worried they’ll make less money, so they’re all looking for other ways to keep the dream alive.

Sounds like a big bet. Will it work?

Selling ads against mobile video is a tough game, considering your main competitors are Facebook and Google.

It turns out that A: They're pretty good at ad technology themselves (read: the best in the world) and B: Most of the video people are watching on their phones is coming from either Facebook or YouTube. So even if Verizon does launch its own video streaming service, why would anyone use it when they still have YouTube and Facebook? Oh, and what if it's only on Verizon? That leaves out a huge chunk of the market that might never see those ads.

Meanwhile, if Verizon launches its own streaming video service, then it’s suddenly in the content business. That could raise some regulatory red flags. This deal still has to be approved by regulators, who might be worried that Verizon could prioritize its own video service over, say, YouTube.

Enough about business. What about me? 

Well, if Verizon does launch a new streaming video service, it could be a reason to stay a customer, if you like what they’re offering. They might use it to lure new customers onto the service, because they figure mobile video is huge and only getting huger.

On the back end, it’ll probably mean a lot more tracking of your behavior. Verizon’s already gotten in some hot water for using “super-cookies” that track your browsing and location information even if you thought you opted out on individual websites. Wanting to serve you targeted ads gives it even more reason to track everything you look at. So, choose wisely.

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