Verizon to buy AOL in $4.4B bet on mobile, video

The deal for the former dot-com luminary is all about trying to find a new path forward in getting digital content out to consumers and the advertisers who'll follow them.

Don Reisinger
CNET contributor Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.
Don Reisinger
4 min read

Tim Armstrong will continue to lead AOL after it's absorbed by Verizon. Getty Images

With advertisers' dollars in mind, Verizon Communications plans to swallow up AOL and its digital content.

Verizon announced Tuesday that it has signed a deal to acquire AOL for $50 per share, for a total value of $4.4 billion. A powerhouse during the dot-com boom more than a decade ago, AOL has become something of an afterthought amid today's online trendsetters, but it does have a stable of Web publications and packs some video savvy as well.

The takeover reflects Verizon's growing video ambitions and its desire to marry that with its own mobile prowess. The biggest mobile carrier in the US through its Verizon Wireless unit, the company has been bolstering its video offerings, not only with its Fios service that provides pay TV alongside connectivity and telephone services, but also by pursuing new forms of video over the Internet.

Verizon has been working to nail down so-called "over the top" video, delivered via the Internet rather than through traditional cable, satellite or broadcast networks. The company said it plans to provide a "mobile-first" platform, driving AOL's content over its LTE wireless network to consumers.

With the acquisition of AOL, Verizon will gain content providers including The Huffington Post, TechCrunch and AOL.com, as well as original video content and an advertising platform.

"Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform," McAdam said. "This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."

Worldwide, the digital advertising market in 2014 was worth $145 billion, according to the research firm eMarketer, and AOL's share was less than 1 percent, well behind leaders Google (31 percent) and Facebook (8 percent). AOL's portion in the US alone was slightly over 2 percent.

Mobile advertising, meanwhile, is set to jump from $42.6 billion worldwide in 2014 to $68.7 billion this year, eMarketer said.

Last year, Verizon acquired Intel's Internet TV business after the chipmaker failed to get it off the ground. McAdam offered a similar sentiment at that time, saying that Intel's TV service, called OnCue, would "help Verizon bring next-generation video services to audiences." Rumors of a possible AOL acquisition began heating up earlier this year.

Rival AT&T has been providing over-the-top video content through its U-Verse platform, which allows people to stream live television, shows and movies. It's also in the process of acquiring satellite TV provider DirecTV.

For Wells Fargo Securities analyst Jennifer Fritzsche, the AOL deal underscores a widening gap between the approaches of AT&T and Verizon. "While [AT&T] believes there is a greater need to own more physical infrastructure (through DTV)," Fritszche wrote in a note to investors Tuesday, "[Verizon] is building up more assets to strengthen its 'mobile first' OTT initiative with advertising playing a key role."

AOL's ups and downs

For AOL, the proposed Verizon acquisition is just the latest event in what has been a bumpy history.

AOL was founded in 1983 as a company known as Control Video Corp., which operated an online service called GameLine for the Atari 2600 game console. After a rough time in the 1980s, CVC was rebranded to America Online in 1991.

On Tuesday, AOL was a hot topic of conversation. AOL

The 1990s were good to America Online as it grew to become one of the most prominent providers of dial-up Internet service. But as customers started to move to broadband, AOL suffered a crisis of business model and agreed to a merger with Time Warner in 2000. Though the deal was supposed to breathe new life into AOL, the efforts fell far short. In 2005, Google acquired a 5 percent share of AOL for $1 billion, valuing the company at $20 billion.

Soon after, AOL's valuation started a steep decline, and in 2009 Time Warner spun it off. AOL's focus as an independent company under CEO Tim Armstrong was on content, advertising and social integration. In 2011, AOL bought The Huffington Post, followed by a string of acquisitions that included mobile photo-sharing app Hipster.

Although it was a difficult first decade in the 2000s, Armstrong was able to stabilize AOL by 2013 and announced the company's first quarterly revenue growth. Over the last several years, AOL has watched its business steadily grow, to $2.5 billion last year. The company generated a $125.6 million profit in 2014.

Still, investors have been discontent with AOL and over the years have called on Armstrong to sell the company. In November, activist AOL investors said the company should sell itself to Yahoo, though that deal never materialized.

Neither Verizon nor AOL mentioned how they'll handle AOL's lingering dial-up business. Last week, AOL revealed in its earnings report that it still has 2.1 million people who are connecting to its dial-up service. AOL charges customers $20 per month for that service.

If the deal is approved by regulatory bodies, AOL will become a wholly owned subsidiary of Verizon, and Armstrong will remain in charge of it. Verizon expects the deal to close this summer.

The deal is a tender offer, meaning Verizon will acquire all shares on the open market from current investors; the board at AOL is not required to approve the deal for it to go through. Such a deal usually carries a premium to entice shareholders to accept the offer. In the case of AOL, Verizon is offering a 17 percent premium on AOL's closing price of $42.59 on Monday.

AOL's stock was up around 18 percent to just over $50 a share in morning trading. Verizon's shares were down by less than 1 percent to around $49.50.

"We are excited to work with the team at Verizon to create the next generation of media through mobile and video," Armstrong said.

This story has been updated throughout the morning.