Verizon's acquisition of AOL is a move to disrupt the TV market

Faced with the FCC regulating its networks like a utility, Verizon steps up to monetize video and television.

Verizon acquires AOL $4.4 billion to disrupt TV market

With its recently announced acquisition of AOL, Verizon now stands with the television disruptors attacking this $400 billion market in opposition to incumbent television networks and entrenched ratings service Nielsen. Telecom giant Verizon's move signals an uptick in the rate of television disintermediation.

In the announcement, the company said "Verizon's acquisition further drives its LTE wireless video and OTT (over-the-top video) strategy." Verizon bought AOL for its Platforms Group's digital accountability and programmatic advertising that it needs to make money with video. Verizon doesn't appear to have interest in or a strategic alignment with AOL's other brand and membership groups. And Verizon won't compete directly with Google and Facebook's mobile advertising businesses; if that were its intention, it would have bought a mobile ad network like Millennial Media for a fraction of the price it paid for AOL.

Verizon won't continue to expand its Fios network to create a faster version of Comcast's cable business, but it will invest in the next generation of video.

"Telecom competitors are the least of Verizon's worries," Seth Alpert, managing director of AdMedia Partners, says. "Transformation of how content, especially video, is delivered, consumed, and monetized is top of mind."

Verizon intends to give video advertisers and publishers what digital marketers take for granted – granular measurement of every ad buy. Digital advertisers can accurately personalize ads, know the exact number of people who clicked, and then track them from television to PC to smartphone to tablet. Amazon and Netflix have an intimate relationship with their viewers, for example, which provides insight into exactly how specific subscribers consume video.

But Nielsen and the television networks can only guess based on randomly selected digital data and census data collected by third parties. Though newer cable boxes will provide Nielsen with data sets that offer better ad personalization, relatively few are installed. At the SMPTE Entertainment Technology in the Internet Age conference last summer, a senior television engineer described Nielsen's methodology as "Wall Street employing a person to mark trades on a black board instead of a computer-based quote system."

The Platforms Group offers video content creators a platform on which they can monetize their products with digitally personalized and accountable advertising on all devices. It also offers video advertisers a platform to distribute and measure their video ad campaigns. AOL added capabilities to its Platforms Group with strategic video acquisitions, starting with in 2013 and continuing into the following year with Gravity, Convertro, and Vidible.

If Verizon can nurture and integrate these fledgling businesses into its network, advertisers will measure the ROI of video campaigns across devices with the precision of their internet advertising counterparts. This shift to digitally accountable television advertising could disrupt television networks in much the same way that the internet disrupted the newspaper and magazine publishers. 

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AOL has talked to a number of media companies during negotiations with Verizon about divesting the Huffington Post, the major component of AOL's Brand Group, for as much as $1 billion, according to Recode. It's a statement that the company doesn't want to be a news and blog aggregator. The Membership Group, which includes the old AOL dial-up internet company's assets, doesn't deserve much strategic consideration other than that it throws off over a half billion in cash every year. According to Alpert, "it's a slowly declining asset that produces a lot of cash but doesn't have a lot of buyer attraction."​

AOL and Verizon share an interest in strategic video acquisitions. In January 2014, Verizon acquired Intel Media. Intel built an incredibly efficient infrastructure for delivering OTT TV designed to deliver broadcast-quality television content over the internet. Although Intel was able to deliver the technology proven in a large trial, it could not sign profitable agreements with the TV content networks to deliver the content with its OTT TV service. Perceived as a distraction to the turnaround of its core chip business, Intel sold the business to Verizon.

Almost a year and a half later, content distribution has changed. Had Intel tried to launch its OTT television service today, it could have acquired content. Netflix and Amazon have proved that streaming services can create award-winning original content that consumers will pay for and watch. HBO has broken its exclusive distribution relationship with cable and satellite TV and now sells its content directly to cord shavers and cord cutters with an a la carte OTT television service. And, most notably, Verizon distributes NFL content to premium plan customers via its mobile app. Television content creators are warming to emerging distribution channels. Verizon already has relationships with the content creators providing television programming for its Fios network, which will ease the negotiation to deliver LTE wireless and OTT television.

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Five years ago, Verizon said it would not expand Fios into new cities and towns, and in its Q4 2014 earnings call the company said it was nearing the end of its Fios build-out commitments. A glance at the Verizon Fios coverage map, side-by-side with the Verizon Wireless map, explains why OTT and LTE are important. With only 5.6 million Fios customers, Verizon doesn't have the internet footprint to reach the entire country with its video service using its own network like a cable company. The Intel Media acquisition will give them access to over the top of other internet service providers' networks.

With 130 million subscribers and a national footprint, Verizon Wireless can reach the entire country. A feature called Broadcast LTE, which optimizes the wireless networks for video, is in trials and has worked in demonstrations. With Broadcast LTE, Verizon can operate a wireless television network if it chooses. The 5G wireless networks currently under development transmit at 1 gigabit per second (Gbps) speeds, 40 times faster than the FCC's definition of broadband speed, and even faster compared to what most consumers experience at home.

It's hard to tell what mobile and OTT video and television will look like in a few years. But it will probably look like a combination of streamed video like Netflix, ad hoc video sharing like YouTube, and linear television networks like Comcast that consumers will watch on every screen they own. Verizon won't be just another wired or wireless internet service provider regulated like a utility by the FCC. It will monetize its network with video content.

Could Verizon become a content provider? Asked about Verizon buying a content company like Netflix, Alpert said "based on Netflix's market caps of about $35 billion and the risks associated with content production, although they could finance an acquisition, I'm doubtful that [Verizon] will want to own a content creator, at least for now."

Copyright © 2015 IDG Communications, Inc.

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