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Verizon Announces Purchase of AOL for $4.4 Billion

Verizon announced this morning that the company is buying AOL for about $4.4 billion. By combining one of the largest mobile network providers with a leading content producer, Verizon aims to become a more significant player in the area of digital media.

While the development left many wondering whether AOL was worth the investment, it seems that more than anything, the acquisition was principally motivated by the desire to take advantage of AOL’s foothold in advertising technology. Last year, AOL earned $995 million from ads on its own properties, and $856 million from the sale of ads for third party websites. The company’s advertising technology segment grew by 39% between 2013 and 2014 alone. With this acquisition, Verizon will be able to make use of this technology to compete with companies like Google, Yahoo and Facebook.

What makes the online advertising technology so effective is its use of algorithms to connect brands’ and ad agencies’ advertisements with the most appropriate audience across different modes of media consumption (such as mobile, television, and desktop).The automation of this process drives down the price of advertising, and AOL is able to largely eliminate the need for human intervention in the ad distribution process. This is known as “programmatic advertising”.

Verizon’s purchase of AOL may have also been partially motivated by the fact that they have previously stated plans to launch a video service for mobile users this summer. AOL is already a provider of online video services, so Verizon may have factored this into their negotiation process. Otherwise, they may also be considering differentiating the video streaming service from competitors by powering the service with advertising, in which case AOL’s abovementioned advertising technology infrastructural could be instrumental.

Whatever the motivation for the acquisition, AOL will become a division of its own within the wider company, retaining CEO Tim Armstrong at the head of its operations. A former executive of Google, Inc., Armstrong has presided over much of AOL’s move into the realm of advertising technology since becoming CEO in 2009. In an interview regarding the deal with Verizon, Armstrong was positive about the development, stating that, “This gives us a real seat at the table for the future of media and technology”.

Interestingly, while those executing the arrangements may have their eyes on the future, a significant portion of AOL’s revenue still comes from a holdover of the company’s past. Bringing in over $600 million last year, AOL’s third-largest revenue segment comes in from its over 2 million dial-up internet subscribers. Other sources of income include its news sites, such as The Huffington Post and TechCrunch. All-in-all, in 2014 AOL generated revenue of $2.5 billion.

The purchase, subject to regulatory approval, is expected to close at some point this summer. Verizon has stated that the company will be funding the purchase with a combination of cash on hand and short-term corporate loans.

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