Verizon said Tuesday that it plans to pay $4.4 billion to buy AOL in a deal that appears to have little to do with AOL’s best-known pieces: its lucrative dial-up Internet users — they’re still out there — and the popular news site the Huffington Post.
This deal is about helping Verizon, the biggest U.S. wireless carrier, crack mobile video, a segment that consumers increasingly love and advertisers covet.
And it’s a sign of how Verizon is following the path blazed by its rivals — Comcast’s purchase of NBCUniversal in 2011, AT&T’s current bid for DirecTV — as the companies that provide the pipes bulging with video scramble to find ways to make money from it, too.
And in this area, AOL, the long-dethroned king of the Internet, has reemerged as a quiet standout.
Today, AOL trails only Google and Facebook in the number of people who view its online videos, according to U.S. data from ComScore. At the same time, AOL is the No. 4 producer of online video ads. The company also has invested in automatic advertising tools for buying and targeting ads online.
That’s what Verizon is after, said Andrew McNellis, analyst at Evercore ISI. “And I think it makes sense.” Wireless companies such as Verizon have struggled to wring more profits from customers who are watching ever-growing amounts of video on the go. So Verizon could use AOL’s tools to make more money from the mobile video ads seen by customers watching movies or sports on their phones.
John Stratton, Verizon’s president of operations, pointed to the unsexy mobile ad tools as the deal’s prime driver.
“For us, the principal interest was around the ad tech platform,” Stratton said during a Jefferies analyst conference call Tuesday.
The acquisition is not seen as a huge risk for Verizon, a behemoth valued at more than $200 billion. The company is offering $50 a share for AOL, a premium of nearly 16 percent above Monday’s closing price. AOL will be a Verizon subsidiary, and a small one at that.
The AOL that Verizon is snatching up is a far cry from the lumbering tech giant formerly based in Dulles, Va., that in 2000 bought Time Warner for $164 billion in what was chalked up as one of the all-time worst corporate mergers. AOL is now headquartered in New York. Last month, it quietly sold 65 acres of its former home base in Loudoun County, where last year it finally fell off the county’s list of largest employers — yet another sign of AOL shedding its past.
In recent years, AOL chief executive Tim Armstrong pushed the company to focus on mobile and video. In 2013, AOL paid $400 million to buy the online video ad platform Adap.tv — an unheralded but important deal that was larger than AOL’s purchase of the Huffington Post, for $315 million in 2011.
Armstrong is expected to stay on after the deal. So are AOL’s high-profile content brands — TechCrunch, Engadget and the Huffington Post, an AOL spokeswoman said. Prior to the Verizon offer, AOL reportedly was in talks to spin off the Huffington Post for as much as $1 billion. McNellis, the analyst, said he would not be shocked if that still happens.
But AOL’s future is very much tied to its advertising technology platforms, which are used by companies across the Web. That part of its business grew 21 percent last quarter compared with 2014 and generated 45 percent of corporate revenue of $625 million. By comparison, the content group that includes Huffington Post was up just 8 percent, making up about 30 percent of revenue. And revenue from the 2.2 million people who still pay for AOL dial-up Internet access fell 7 percent.
The excitement surrounding online video ads can be seen in what’s happening with AOL’s competitors. In November, Yahoo paid $640 million to buy BrightRoll, the No. 1 online video ad provider. And in August, Facebook snapped up the No. 3 provider, LiveRail, for a reported $500 million.
Now, Verizon is jumping into the game, making a heavier bet on mobile than its competitors Comcast and AT&T. Those two firms bought companies that play mostly to the biggest screen in the room: the TV. AT&T’s $45 billion bid for DirecTV is expected to be approved by government regulators within several weeks, according to a person with knowledge about the review who spoke on the condition of anonymity to discuss matters that haven’t been made public.
This type of one-two corporate punch is what made Comcast’s deal to buy NBCUniversal so significant — it gave Comcast control of a large broadband business and an array of films and TV shows.
“The fog has lifted in this industry,” AOL’s Armstrong said in an interview on CNBC on Tuesday. “I think the companies that do the best job of both distributing and providing content and services to people are going to win.”
Verizon began moving in this direction last year when it snapped up an Intel project aimed at developing streaming video. That business, OnCue, was said to be a key part of Verizon’s ambitions to deliver video to smartphones and tablets over its cellular network.
In March, Verizon announced it would be rolling out a streaming-video app to compete with the likes of Hulu and Netflix. Verizon officials hinted that the service might not rely on subscription fees but rather on advertising. A tie-up with AOL would probably support such a strategy.
Verizon’s bid for content could attract scrutiny from federal regulators who worry about Internet providers becoming overly powerful gatekeepers of information. But the Verizon-AOL deal is not just about mobile video. AOL said that it will continue its dial-up Internet service, too.
That’s good news for John Walters, an 81-year-old retired college administrator who lives in Manhattan, Kan. He pays about $60 a year for unlimited dial-up service.
Walters and his wife use their Internet connection to look things up and keep up with friends on social-media sites. He said he is “too much of a creature of habit” to make a switch.
“There are some things that could be better, but I don’t have a lot of experience with other services and I have a hard time comparing them,” he said.
Cecilia Kang contributed to this report.