On Tuesday, telecommunications giant Verizon announced that it plans to buy AOL, which has in recent years transitioned from an Internet gateway to a provider of online video services, content, and most notably, online ads.
AOL’s ad revenue last year was around $1.8 billion, in contrast to the $600 million it still makes from its dial-up business. It also owns the popular websites The Huffington Post, TechCrunch, and Engadget. (Though perhaps not for long, according to Fortune’s Mathew Ingram.)
Under the terms of deal Verizon (VZ) would acquire AOL (AOL), which will remain a separate division, for about $4.4 billion, or $50 a share. The deal, subject to regulatory approval, could close over the summer.
Verizon’s interest in AOL goes well beyond the latter’s online dial-up business, which led the Internet revolution throughout the 1990s and led to its rapid growth.
“If you look at the wireless and wireline industry over the last decade or two you’ll see it has changed dramatically; and it will continue to do so over the next decade and beyond,” says Jeff Kagan, a telecommunications industry analyst. “In that world carriers need to improve and innovate their offerings to their customers. This will help Verizon in that way. This will help Verizon with all the areas that AOL has been working on including advertising in the tech world and on the Internet.”
But the fact that Verizon seeks to buy AOL is just the latest chapter for the Internet pioneer, which saw its merger with Time Warner (TWX) fizzle out less than a decade ago.
“The thing that people forget about the AOL Time Warner merger was that AOL was buying Time Warner,” says Dan Cryan, senior director of media and content at IHS Technology. “It was a huge deal, and in some way it was a harbinger of the things to come—the big-money acquisitions that we’re seeing now.”
Over the years, AOL has scaled back its original content efforts. At its peak, the company owned about 300 digital publications. Today, it publishes slightly more than a dozen.
“Since the divorce from Time Warner, AOL has gone through a process of reinventing itself and the Internet pioneer has been reinventing itself at Internet speed,” Cryan says. “It has reinvented itself from a dial-up business, which actually refuses to go away and still makes money for AOL, to a content provider. The key for AOL today is its ad tech, which could give Verizon the potential to apply adverts to much of what it is already doing.”
The growth of AOL’s ad business hasn’t been by accident. Chief executive Tim Armstrong previously helped oversee Google’s DoubleClick division and has been widely credited with investing in and expanding AOL’s advertising technology, which has integrated a real-time bidding platform to help marketers buy ads across the web. Through this acquisition Verizon could extend its reach as a global media player, as Fortune‘s Erin Griffith wrote yesterday, and expand its mobile advertising business.
“When we think about Verizon and AT&T, we think phone companies,” says Kagan. “But going forward, they’re not phone companies any longer. They’re much bigger and much more advanced than just telephone and wireless.”
Verizon, which has been successful bringing Internet and video to the home, has plans to launch a streaming service this summer, which could focus on delivering content to mobile devices. It already has the nation’s leading wireless network. In the press release announcing the deal, Verizon CEO Lowell McAdam said AOL could allow Verizon to tap “into the market shift to digital content and advertising. AOL’s advertising model aligns with this approach, and advertising platform provides a key tool for us to develop future revenue streams.”
It could also allow Verizon to set up ad deals for other companies.
“This is a positioning deal, to provide ad-serving to the mobile video sectors,” says Clyde Wayne Crews, Jr., vice president for policy and director of technology studies at the Competitive Enterprise Institute. “TV is said to be on the way out, but at the same time TV drama is in a golden age because of the different methods of delivery. This includes the mobile handset. This deal makes sense as it puts Verizon in a commanding role to deliver content on handsets and reap the rewards from the advertising.”
And at the center of the deal? A Time Warner-less AOL.
For more, read: 15 years later, lessons from the failed AOL-Time Warner merger