Verizon Communication’s (NYSE:VZ) $4.4 billion deal to scoop up AOL Inc. (NYSE:AOL) is all about diversifying its business and generating new revenue streams in the face of a maturing industry.
Analysts say the wireless giant’s competitors are already making similar moves to boost their bottom lines and more acquisitions are certain to follow.
“The issue is, in a maturing market, how to increase revenues when the market is saturated and not growing: by creating additional services people want to access, either through direct pay or through paid-by-ads,” said Jack Gold, founder and principal analyst at technology research firm J. Gold Associates.
Verizon’s purchase of AOL will reconfigure the biggest U.S. wireless carrier into a leading provider of content and video for the web and mobile phones. Verizon’s $50-per-share offer represents a premium of 17.4% to AOL's Monday close. AOL and its content properties including the Huffington Post, TechCrunch and Engadget websites, would become a Verizon subsidiary and AOL Chief Executive Officer Tim Armstrong will remain in his role.
New Sources of Revenue
Gold said Verizon is buying AOL and AT&T (NYSE:T) is buying DirectTV (NASDAQ:DTV) for $49 billion in a similar (but much larger) deal announced last November because both wireless carriers need to create new sources of revenue.
“As the market for devices becomes mature and essentially saturated in the U.S., the amount of (average revenue per user) is not going to expand anywhere nearly as fast as in the past,” he said. “So AT&T goes for content with DirecTV. Verizon goes for content creation and ad revenues with AOL. They are looking for diversified revenue streams and ways to generate additional revenues per user beyond what they can charge for pure connectivity,” he said.
“Will it work?” Gold asked. “Remains to be seen, but there's not much choice if Verizon (and others) want to grow revenues.”
Eric Jackson, a founder of PayPal and now chief executive of CapLinked, an online platform for private investing, said Verizon’s wireless competitors are undoubtedly looking to diversify and add revenue through acquisitions, but might move in a different direction than Verizon.
“Given that Verizon views the AOL purchase as its means to enter the mobile advertising and content arenas, it seems likely that its competitors will be watching closely to see how well it performs,” Jackson said.
“But I don't think that AT&T or Sprint will necessarily race out to purchase similar companies. They may very well conclude that social platforms like Pinterest or Twitter or communications platforms like Snapchat are a better way to diversify and stay relevant. Those platforms could deliver significant online advertising revenues without the expensive operating costs associated with original content production,” he added.
Verizon’s acquisition of AOL seems also to have been targeting Verizon’s less traditional competitors such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and HBO as much as its direct wireless competitors like AT&T and Sprint (NYSE:S).
Wondering What to Do
Jackson said Apple and Google have “long since wrested control of mobile content away from the carriers.” Now the carriers are trying to catch up.
The widespread adoption of Apple’s iOS and Google’s Android operating systems as the two dominant mobile platforms has helped content-distributors like Netflix (NASDAQ:NFLX); Amazon (NASDAQ:AMZN), and HBO to initiate and implement online-focused strategies that are all seeing promising early results, Jackson noted.
“This leaves carriers like Verizon wondering what to do as they saw the ground shifting beneath their feet,” he added.
Mark Lowenstein, managing director at consulting firm Mobile Ecosystem, said Verizon is also taking aim at cable giant Comcast (NASDAQ:CMCSA). He added that while the Verizon/AOL deal may spur additional acquisitions down the road, Verizon is currently the company playing catch up here.
“It looks like the battle is on between Verizon and Comcast,” he said. “It was done more with Comcast in mind than any other competitor. Comcast owns important content and Verizon is clearly trying to build another leg to its business. Everybody is trying to do some deals where they think they are weak.”