Verizon Communications—the parent company of U.S. mobile operator Verizon Wireless—has agreed to purchase U.S. media and entertainment company AOL for US $4.4 billion. The all-cash deal values AOL at US $50 per share, a 23 percent premium over its three-month volume-weighted average price. AOL shares rose 18 percent on the news, while Verizon shares fell 1.7 percent. The acquisition will give Verizon access to AOL’s streaming video content and mobile ad targeting technology. Verizon’s president of operations, John Stratton, said, “Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform.” Tim Armstrong, CEO of AOL, said, “If there is one key to our journey to building the largest digital media platform in the world, it is mobile.”

Tarifica’s Take

While the amount Verizon has agreed to pay is very large in light of AOL’s very small revenues—US $625 million in the first quarter, compared to US $32 billion for Verizon—the key to this deal is what kinds of long-term advantages AOL could provide the telecom giant. AOL started out as an internet portal in the 1990s and still has a legacy dial-up access business that is profitable. But after some major reversals, the company has reinvented itself as a content provider, with web properties like the Huffington Post and, most importantly, video content aimed at mobile devices. But while Verizon will be able to generate revenue by providing exclusive access to AOL content to its mobile subscribers (over LTE and OTT), the greatest boon of the acquisition will be from AOL’s mobile ad technology. This allows ads to be targeted to users based on their preferences and other metrics, and will give Verizon the ability to sell ads to a wide variety of companies that are targeting mobile users who are not necessarily subscribers of Verizon.

In short, Verizon, looking for an edge in the rapidly growing mobile ad sector, is betting on this technology. AOL’s success in this sector is notable—its third-party advertising division grew 19 percent in the first quarter, to US $231 million. So while the numbers are so far quite small in relation to Verizon’s size, this relatively low-cost deal—low cost for a company valued at over US $200 billion—could position the telecom provider to credibly compete with Google and Facebook in the expanding quest for mobile advertising dollars, which are intimately tied up with mobile video content delivery.