The real reason Verizon bought AOL

June 24, 2015, 6:23 PM UTC
Photographs by Getty Images

Verizon recently completed its $4.4 billion acquisition of Internet pioneer AOL (AOL). The deal comes 15 years after the company joined forces with Time Warner in 2000, which is widely considered one of the biggest business flops in U.S. corporate history.

The new merger is worth a lot less than the failed $160 billion Time Warner-AOL deal, and it’s safe to say expectations surrounding this new acquisition are much more conservative. Unlike the previous merger, Verizon (VZA) isn’t trying to create an Internet powerhouse with this investment. It’s likely just trying to gain some type of foothold in the changing online industry, as its traditional communications business slows down.

The telecom giant is one of the most successful companies in the world (it currently sits at number 15 on the Fortune 500), and its growth has largely been driven by its wireless business, which now boasts 108.6 million mobile connections. However, growth in the mobile market is likely to slow in the coming years, with any significant revenue generated by luring consumers away from competing mobile operators or selling current customers more than one device. The days of huge quarterly subscriber connections are over, which means the company needs to find a new cash cow if it intends to keep growing.

Potentially lucrative telecom acquisitions aren’t an option for the firm either, at least not these days. Both AT&T’s (T) and Sprint’s (S) failed attempts to acquire T-Mobile delivered a strong message to the U.S. mobile industry that regulators won’t tolerate any more consolidation among nationwide operators.

On the consumer wireline side, Verizon isn’t seeing any real gains and for all intents and purposes is currently in a holding pattern, if not full-on retreat. It’s selling off its old copper phone lines and DSL connections in many smaller markets, and while it’s FiOS fiber-to-home business sells a lucrative service bundle—which includes high-speed broadband, phone and TV programming—it hasn’t expanded the network to new cities since 2010. Additionally, Verizon recently began selling off its FiOS systems in California, Florida and Texas.

If Verizon intends to keep expanding, new growth won’t come from adding more customers each quarter or through acquiring a competitor. The company will have to make more money off its existing customers through alternative means, because its traditional avenues for increasing revenue—voice, messaging and data—won’t cut it. Verizon already offers unlimited voice and text plans to most of its customers, and while data usage is increasing, competition is gradually driving down the per-gigabyte prices.

From Verizon’s standpoint, it needs to find something it can sell via its available networks, whether that means selling services directly to the consumer or to other companies trying to reach its customer base. That’s where AOL comes in.

While AOL may be most known for its dial-up services and growing content empire —which includes The Huffington Post, Engadget and TechCrunch—it also has put together a sophisticated suite of advertising technologies for online and traditional media that no other company (aside from Google and Facebook) can match. AOL’s platform is particularly strong in video advertising—which CommScore says reaches more than 50% of the U.S. population. The Internet company’s successful digital platform will also coincidentally assist Verizon’s plans to launch its own Internet TV service, which it announced this year after buying Intel’s media assets in 2014 and video delivery network EdgeCast in 2013.

A popular digital platform may well be the last component Verizon needs to get its Internet video service off the ground, and boost revenue. Mobile operators in other countries like NTT Docomo in Japan and Turkey’s Turkcell have built successful businesses off of engaging advertising and content, according to wireless industry analyst Chetan Sharma.

In short, Verizon can expand beyond the telecom industry’s limitations by using its extensive network to enter an entirely different industry. Just because it has the pieces, though, doesn’t mean it can successfully complete the puzzle, Sharma says. Operators have tried to become content developers before, and proven that it’s not as easy as it seems.

For example, Verizon and its competitors have sold ringtones, offered services like cloud storage and launched their own app and content stores, but gradually all of those offerings eventually dried up.

With AOL, Verizon is getting a proven platform that could get it back into the services and content market, although it won’t be straightforward, says Sharma. “The challenges of these new initiatives residing within a large corporation remain, and Verizon will have to work extra hard to make sure that the entrepreneurial culture and the brain trust stays intact.”

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