Verizon and AOL

I was reading about Verizon’s recent $4.4 billion cash purchase of AOL. Most M&A transactions have a strategic reason, or a few reasons, that are clear at first sight. However I struggled to fit the pieces of the puzzle together in this case.

Browsing the web, it seems as though a lot of people experienced the same confusion. It’s unusual for a company like Verizon which controls the infrastructure layer to purchase a company like AOL that operates primarily on the content layer. The best piece I could find on the motivations behind the merger were in an Andreessen Horowitz podcast featuring Chris Dixon and Frank Chen.

You can listen to the full 12 minute podcast here. I’ve summarized my key takeaways below, together with my views on the merits of each takeaway in italics.

1. Carriers like Verizon are becoming dumb pipes and original content is becoming more valuable. So Verizon is simply trying to shift away from an area of low value to an area of high value. While this argument makes sense, I’m not sure that AOL would be the best target for Verizon to execute this strategy. Rather than buy all of AOL, Verizon could have bought individual content properties within AOL, and much better properties outside of it, at an aggregate lower price.

2. Newspapers were the first form of traditional media to experience disruption and TV is next. This makes mobile video content and the ad technology to monetize this content very important. AOL’s ability to track users across content platforms could complement Verizon’s ability to track users and devices across its network infrastructure to create a very powerful ad network. This seems like the most credible explanation to me as it has the potential to justify a multi billion dollar price tag.

3. Verizon may have purchased AOL in order to side step net neutrality regulations which require carriers to treat all content traveling over their network equally. Verizon could use its ownership of AOL to justify making AOL content available to its users at no data cost. This would pull more users to Verizon and make it more attractive for other content owners to enter into zero rating agreements with AOL in order to make their content available to Verizon’s larger user base free of data charges. While a plausible argument, this seems like a risky strategy. We have yet to see how net neutrality regulations play out in practice. A carrier’s ownership of a content property may not be enough to justify making it available at no data cost. And similar to my comments on the first argument, if Verizon wanted to attract more users and get more zero rating agreements with content owners, it would likely have pursued individual content sites rather than all of AOL.