To Compete With Advertising Giants, AOL and Verizon Unite

Verizon’s $4.4 billion acquisition of AOL gives the wireless company numerous ways to reach users and boost its $87.6 billion in 2014 revenue with a bevy of advertising offerings. The combination of the two companies allows for more than either could accomplish alone.

That’s one of the main takeaways from Tuesday’s merger announcement, particularly as it relates to Verizon’s (NYSE: VZ) and AOL’s (NYSE: AOL) standing among ad-focused Internet companies.

To say that Google is the most dominant format for searching the Internet is perhaps obvious. But that dominance translates into something most people don’t think about as much: Google is an advertising giant among tech companies. The company’s $59 billion in 2014 advertising revenues dwarfs its competitors. Sunnyvale, CA-based Yahoo’s total annual revenues (most of which come from ads) sank about 1 percent to $4.6 billion last year, while New York-based AOL’s increased 15 percent to $1.9 billion.

Does it amount to very much, then, that Verizon is buying a company with a mere 3 percent of Google’s revenue, and a brand more commonly associated with a screeching modem in the 1990s than the high-tech state of the art? To put it simply, yes.

AOL was particularly active last year in boosting its mobile, video, and other online advertising business. It acquired Vidible, a programmatic video distribution platform, for $55.9 million in December; it bought Converto, which helps marketers plan their advertising budgets, in May for $98.6 million in May; and it paid $83.2 million for an advertising personalization company called Gravity in January.

The key behind modern advertising is getting people to pay attention to ads because they care about what is being advertised. That is old hat to Google and other ad-focused tech companies like Facebook ($12.5 billion in 2014 revenue), which have been using information about users for years to better target advertisements.

And more and more advertising revenues are coming from smartphones and tablets as Internet users shift their focus to apps and mobile content. Plenty of companies have been using Verizon’s vast cellular network to reach the carrier’s users with both ads and content, from Facebook to Netflix (called an over-the-top service because it isn’t controlled by a carrier or cable operator).

Verizon, sitting idly by in New York and frustrated with its giant network of mobile subscribers helping Facebook and Google earn billions of dollars in ad revenue, appears to be saying, why not us, too? As AdvertisingAge noted, ad campaigns are more effective when you know the location of the person being advertised to—you can see if they visited a store after seeing the ad—and Verizon’s network is handy for pinpointing the GPS coordinates of a mobile user.

Indeed, the acquisition may be a sign that mobile operators are intent on battling back against those who have made money on their networks without giving them a cut. It also might just be another baby step, and not a final leap, toward creating a company that successfully incorporates software, connectivity, and content, as a report in The Wall Street Journal proposed.

While Verizon will certainly benefit from acquiring other assets in AOL, including The Huffington Post and various other media sites, that doesn’t appear to be what this deal is about. What is clear is that Verizon sees the dollar signs in the eyes of its customers, who are easy targets for advertising as they stay glued to the social media, streaming video, and other content all easily accessed through a mobile device.

And the merger would give the East Coast—and New York specifically—a more unified tech anchor that understands the immense value of content advertising. Whether that translates into Verizon taking business away from the advertising giants out west remains to be seen.

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at [email protected] Follow @xconholley

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