A few weeks ago, a McKinsey executive gave a presentation at the Financial Times media conference in London that, in hindsight, explains the entire rationale for the Verizon-AOL deal. The slide deck focused on mobile and digital video consumption and how it was changing the TV and internet landscape.
Verizon's announcement Tuesday that it would acquire AOL for $4.4 billion includes three letters — "OTT"— which confirm why this surprising, puzzling transaction is taking place.
"Over-the-top" is jargon from the broadband industry that refers to the way consumers are increasingly preferring to get their video from the internet rather than from traditional television. (Their video comes "over the top" of television, in other words.)
Verizon provides both traditional cable TV service and broadband internet service, as well as mobile wireless service. But the audience tide has long been slowly ebbing from the old TV model into a scattering of services such as Hulu and Netflix and the (illegal) Pirate Bay, which let people watch video when they want, wherever they want, without having to sit in front of a TV in their living room.
But in the past few years there has been more growth in viewing videos on mobile phones than in any other video medium. Here are two slides illustrating that from the McKinsey presentation, which we saw at the FT conference:
And ...
AOL owns a lot of content brands, such as Techcrunch and Huffington Post, that publish a lot of video. AOL CEO Tim Armstrong has for years been pursuing the idea that he might somehow turn AOL into a sort of internet-based cable TV competitor. And AOL as an advertising seller has been succeeding of late — revenues grew 7.2% in the most recent quarter.
So AOL basically gives Verizon a stake in the future: It gives its customers something to look at after it has sold them the internet access that gets them there and after its stores have sold them a phone to look at that stuff on. Armstrong said as much in his letter to the AOL staff:
If there is one key to our journey to building the largest digital media platform in the world, it is mobile. Mobile will represent 80% of consumers’ media consumption in the coming years and if we are going to lead, we need to lead in mobile.
Verizon even did a similar, smaller deal earlier this year, perhaps as a sort of test run for buying AOL. Multichannel News reported:
Verizon said its coming "mobile-first" service will offer programming from ACC Digital Network, Campus Insiders, CBS Sports, ESPN and 120 Sports. Verizon announced in March that Awesomeness TV, the multichannel network tailored for teens and millennial audiences, will also product more than 200 hours of content for the new offering.
The deal isn't a simple one. Verizon is a completely different business from AOL, and there are few natural "synergies," other than both provide some legacy dial-up web services. Getting these two firms to work together might be difficult. (People of a certain age will remember the disastrous AOL-Time Warner deal, which fell apart on just this issue.)
And there is one obvious thorny patch: net neutrality. If Verizon ever began favoring AOL with web traffic speed over rival platforms like Netflix, you will hear regulators (and consumers) screaming loudly in protest.
But we're not there yet. In the meantime, you can see how AOL incrementally helps Verizon and how Verizon can give a massive leg up to AOL. Hence the deal.
