Coverage: AOL worth $4.4 Billion

Verizon is making a huge bet on mobile ads – a $4.4 billion one with a brand that is nearly synonymous with big mergers gone wrong. AOL is being purchased for its video and mobile ad ability, and Verizon has big expansion plans.

The Wall Street Journal story by Thomas Gryta and Jack Marshall said that the bet for Verizon is one of how and where consumers will consume video:

The $4.4 billion takeover price for AOL Inc., once the centerpiece of a $165 billion megamerger to meld old and new media, is such a pittance that Verizon Communications Inc. will pay in cash and the corporate equivalent of a credit card.

Yet like AOL’s failed merger with Time Warner Inc., the deal announced Tuesday represents a bet on the future of media and technology as big U.S. telecommunications companies pivot into the lucrative business of TV and online video.

The largest U.S. wireless carrier has been steadily amassing technologies that will let it deliver video over the Internet. Verizon’s takeover of AOL, the longtime dial-up Internet service that has remade itself as a force to be reckoned with in online advertising, could help Verizon make more money from products aimed at young people, including a video service focused on mobile devices that is set to launch this summer.

The deal reflects a strategic bet that as the traditional model for television slowly unravels, Americans will watch more video on their phones and tablets, generating a growing stream of data-service fees and advertising revenue along the way.

Farhad Manjoo wrote for The New York Times that mobile is definitely the wave of the future:

His words — and the deal with Verizon he just helped engineer — are just the latest corporate reaction to a staggering shift in the way people across the globe get their news and entertainment. Over the last couple of years, we have collectively decided to use our phones to reach the Internet more than we ever used our computers to do the same thing. And like a horde of aggrieved vultures that has just seen its carrion spirited away to some other part of the savanna, the tech and media business is equally panicked and excited about the vast possibilities for making money from the shift.

At the moment, except for Google and Facebook — which together control more than 55 percent of the $42.6 billion worldwide mobile ad market, according to eMarketer — few companies have managed to navigate the transition from desktop computers to phones. The shift has shaken up just about everything for everyone, such as Internet portals like AOL and Yahoo; carriers like Verizon and AT&T; and eCommerce ventures like Amazon. Some industries — music and newspapers among them — were just figuring out the switch from physical media like CDs and print to the web. But the switch from the web to our phones is happening even faster than the transition away from physical media, and in many ways it is more profound.

Wired’s Brian Barrett said that the current iteration of AOL is nothing like what the company of the past:

To understand where AOL’s value truly lies, it helps to understand its CEO, Tim Armstrong. Prior to signing on to AOL in 2009, he put in nine years at Google, building up its sales efforts and eventually becoming the president of that company’s American operations. In other words, he was instrumental in architecting one of the most powerful forces in advertising history.

His time at AOL reflects that legacy. Over the past seven years, the company has gobbled up marketing firms like Pictela, Convertro, and Adap.tv, along with video-focused shops like StudioNow, GoViral, and Vidible. The result of this acquisition stew is an AOL that knows as much about the online ad marketplace—particularly mobile and video—as anyone. Even more importantly, it knows a whole lot more about it than Verizon does.

AOL has also demonstrated that it can convert that knowledge into hard cash; it took in $1.8 billion last year in advertising revenue, just less than half of which came from serving ads for third parties (which is to say, outside of its own media properties). That $856 million also represented a 39 percent year-over-year growth for the advertising technology side of the business, compared to just 4 percent growth in search ads—and 3 percent decline in display—from AOL-owned sites.

But many are speculating about what AOL will do with their content assets, such as the Huffington Post, Peter Kafka wrote for Re/code:

One scenario we’ve heard is that Verizon intends to spin out some or all of its content operations, like HuffPo, with a third partner, perhaps German publisher Axel Springer.

In an interview with Re/code, Armstrong didn’t address that scenario directly, though he seemed to leave the door open. “We’ve spoken to partners about content and scaling,” he said. “Obviously we’ve seen a lot of interest in the content brands we have. So over the course of the summer, stay tuned.” [UPDATE: AOL is indeed in talks with Axel Springer, as well as other potential investors, to spin out Huffington Post, Kara Swisher reports.]

AOL spokeswoman Caroline Campbell adds that “AOL owns a portfolio of premium, global content brands including The Huffington Post, TechCrunch and Endgadget, among others, and all of them will continue to be part of our business as we go forward.”

Verizon has a lot of work ahead. While programmatic advertising and mobile are the waves of the future and AOL has made some strides in these areas, it isn’t obvious for consumers what they’ll get out of the deal. As many are looking to get ahead in the mobile advertising world, Verizon will have to grapple with content, video and several other areas that are outside their core business, which could be a problem.