Verizon, one of the largest wireless providers in the United States, announced on May 12 that it will acquire AOL, a leading Internet pioneer and Web content provider, for $4.4 billion.
The acquisition is part of what appears to be a growing trend toward better integration between mobile providers and content. Last year telecoms provider AT&T bought satellite TV provider DirecTV.
For companies like Verizon, the need to innovate drives such acquisitions. “It tends to be more difficult for larger companies to innovate, because as they mature their platforms become less flexible and there is a risk adversity that comes with more-established management teams,” explains Gil Ozir, director at AMR International, an international consultancy specializing in media, information and technology. “That is why the route to innovation for most mature businesses is acquisition, even for relatively young companies such as Google.”
The AOL acquisition will have an impact on companies and advertisers around the world. Verizon’s access to AOL’s video technologies will provide advertisers with better access to mobile users, and it will have significant revenue impact for both the wireless provider and advertisers in terms of their ability to sell more products and services.
AOL has experienced many business cycles in its history since its establishment in the early 1990s. The most famous, or infamous, moves were its failed merger with Time Warner in 2001 and its spin-off in 2009. The business case behind the Verizon-AOL acquisition is similar to the Time Warner merger story as both reflect integration between the platform (or distribution channels) and Internet and video content. Yet, the regulatory and business environment has changed since early 2000, and access to emerging news and other digital media platforms, such as the Huffington Post, which is part of AOL, could help Verizon compensate for slow growth in the consumer wireless space.
A potential threat to this business rationale in the future is the rise of programmatic media, which use machines instead of humans to place advertisements. “Clearly programmatic buying is a challenge to media companies, large and small, as it makes bundling and cross-selling a coherent range of products and services more difficult,” confirms Ozir.