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With its Yahoo purchase, Verizon is creating an ad stack to rival Facebook and Google

AOL-owner Verizon Wireless has this morning (25 July) confirmed it is to purchase fellow early internet pioneer Yahoo for a deal worth $4.83bn, which means the company will have shelled out close to $10bn on digital advertising companies in just under a year.

Verizon Wireless has spent almost $10bn digital media companies in just under 12 months

The union of AOL and Yahoo has long been speculated upon (it was first mooted as far back as five years ago), but the current circumstances are hardly those anticipated by Yahoo chief executive Marissa Mayer, who is set to walk away from the company with a $55m severance payment.


Yahoo will now be integrated into AOL, with the man behind AOL’s transformation from ailing has-been to ad tech behemoth, Tim Armstrong now expected to head up the combined entity. As Mayer prepares to walk away, it does beg the question: who’d want to buy a company that lost over $400m in the last quarter alone?

The simple answer is: a company in search of a transition. And Verizon Wireless – the biggest telco in the US – is just such a candidate, which (if all goes to plan) could even look to rival the internet advertising giant’s ‘big two’ of Facebook and Google.

Less or more than the sum of their parts?

In a press release confirming the deal, Lowell McAdam, Verizon chairman and chief executive, said: “The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company, and help accelerate our revenue stream in digital advertising.”

Both AOL and Yahoo were trail-blazers in the early heady days of the internet economy, but at the time of their respective sales, both their stock valuations were a far cry from their zenith. So just why would Verizon want to pay such large sums for a duo that had both seen better days? After all, recent similar mergers – i.e. where two fallen giants pair their resources – have proven less than the sum of their parts. Can anyone remember the ‘Micro-okia’ debacle?

The answer to the first question is Verizon’s (as well as most other mobile operators’) quest for transition. Most telcos in Western economies are locked in a price war, that has seen their profit margins steadily eroded. Meanwhile, companies like Facebook and Google have gained the lion’s share of revenue, especially as internet usage increasingly turns mobile by default.

In the telecoms industry, this is what’s known as the dreaded ‘dumb pipe scenario’, where network operators receive little incremental revenue, in return for shouldering increasing amounts of traffic (that ultimately benefits Facebook, et al.).

It’s also worth noting that Verizon, which currently only has a telecoms licence in its domestic market, can now truly scale its operations globally with its two big purchases over the last 12 months. After all, acquiring telecoms licenses in foreign markets is an expensive, and time-consuming affair, with regulators often placing many barriers in the way.

Yahoo gives the triumvirate a much better search market share

So with the purchase of AOL and Yahoo, Verizon has gained itself significant traction in the online space. True, the pair are nowhere near the popularity they once had in their pomp, but it’s worth looking at ComScore figures which show that as of the first quarter of this year, Yahoo and AOL were the third and sixth-most visited websites in the US.

In addition, the purchase of Yahoo gives the newly formed triumvirate more of a serious stake in the search market. If we look at the US market again, Yahoo had a 12.4 per cent share of the search market in early 2016, this was far behind Google’s mammoth 63.8 per cent lead, but still significantly ahead of AOL’s 0.9 per cent share.

Advertisers would welcome a third way

In this reading, it may seem that Facebook and Google’s hegemony of the digital advertising space seems far removed from threat when it comes to any posed by the Verizon stable. However, when you look at the stance taken by the world’s leading advertising agency WPP, you can see there is an appetite for a third player in the market.

Earlier in the year at Mobile World Congress Sir Martin Sorrell, WPP chief executive took to the conference stage to warn his “frenemies” Facebook and Google that independent measurement of how media spend performs with them is crucial to remain the leaders in their field.

Later in the session he noted how Google was the single-biggest player it spent its clients’ budget with ($4bn in 2015), with Facebook trailing behind News Corp at number three on that list, garnering $1bn during the same period.

However, he did add a caveat that he’d watch the progress of AOL closely, especially given its takeover by Verizon some six months beforehand, today’s purchase it likely to buoy that interest further. It’s well known that most agency groups resent the dominant position of the online pairing, but spend money with them simply because they have to, meaning a third large player with a comparable scale and targeting could alter spending patterns.

Will AOL’s ‘open’ stance deliver budgets from the internet’s ‘walled gardens’?

Of course, the biggest source of chagrin for media agencies spending their clients’ money on digital is the fact that the industry’s largest-two players could be described as walled gardens, i.e. the campaign data they receive back from both players is difficult to compare to campaign performance elsewhere online.

The industry’s big two are quick to defend their stance, claiming they are merely protecting their own users’ privacy, given that they have arguably the industry’s largest pools of deterministic data. Although this brings with it multiple headaches, such as duplication and Facebook and Google ingesting their clients’ data. Agencies are also much more used to dealing with smaller media owners, meaning the traditional buyer-seller dynamic is turned on its head. However, ever since its takeover by Verizon, AOL has been vocal on how it takes a different philosophy to Facebook and Google.

Can AOL & Yahoo take Verizon’s deterministic data targeting global?

With 141 million-plus subscribers, Verizon Wireless has the equivalent number of deterministic user IDs, giving it a huge presence in the US, but just how does AOL and Yahoo intend to leverage this relationship on an international basis?

As a big a number as this is, it is still dwarfed by Facebook’s 1.5 billion (and Google’s even bigger) audience, but if the Verizon stable can port these ID’s on an international basis, then this could truly upend the traditional market leaders.

Speaking with The Drum at this year’s Cannes Lions event, AOL president Tim Mahlman, described its ambitions to build this targeting capability out further: “That’s phase two of how we work with Verizon,” he said.

“Right now we’re reaching out to other authenticated data partners, and have them participate. Therefore, we can go to companies abroad, leveraging this type of platform that Verizon has built. They can then leverage my demand-side platform [DSP], and have them be in a participant in it. That allows us to have this global thinking, and how we can look at Verizon beyond the United States.”