Verizon plans to buy AOL for $4.4B

Deal expected to move Verizon beyond a 'dumb pipe' commodity network provider

aol sign
Jason Persse (Creative Commons BY or BY-SA)

Verizon announced Tuesday it is buying AOL for $4.4 billion to continue building digital, Internet of Things and wireless video services that can drive the company's future growth.

The acquisition will assist Verizon's LTE wireless video and its "over-the-top" (OTT) video strategy, as well as its growing Internet of Things services for both businesses and consumers, Verizon said in a statement.

AOL plus Verizon will allow for a mobile-first approach to digital content and advertising. AOL owns the Huffington Post, TechCrunch, Engadget, Makers and AOL also offers original video content through an OTT service. OTT is an industry term for services not directly associated with a carrier's network that run on top of basic carrier services that involve vast networks of switches, routers, cell towers and wired connections through fiber and other cable.

Verizon Wireless Mike Mozart via Flickr

Verizon CEO Lowell McAdam said the purchase will create a global multiscreen network for a "cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."

AOL CEO Tim Armstrong will remain as head of AOL operations after the deal closes, which is expected sometime this summer. AOL will become a wholly owned subsidiary of Verizon, which will fund the deal from its cash reserves. The purchase will cost Verizon $50 for each share of AOL stock, or about $4.4 billion.

"This is all about Verizon fighting to become more than a dumb pipe," said Patrick Moorhead, an analyst at Moor Insights & Strategy. "If you don't want to be limited to being a dumb pipe, then you have to get into something else like content or services."

Moorhead said consumer telecom offerings from the major carriers are become something of a commodity, which doesn't allow for a single provider like Verizon to easily distinguish itself from the competition.

"All the carriers need other sources of revernue," added Jack Gold, an analyst at J. Gold Associates. "As the market for devices becomes mature and essentially saturated in the U.S., the amount of revenue per user is not going to expand anywhere nearly as fast as in the past, even with Internet of Things and other connected devices."

Gold noted that AT&T is similarly trying to buy DirecTV, and both AT&T and Verizon are hoping to create content and ad revenues. "They are looking for diversified revenues per user beyond what they can charge for pure connectivity," he said.

Copyright © 2015 IDG Communications, Inc.

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