Verizon-AOL: You've Got Privacy Issues

On May 12, Verizon announced an agreement to purchase AOL, “a leader in the digital content and advertising platforms space,” for approximately $4.4 billion. Some may question how the sounds of “You’ve Got Mail” and dial-up modems can command billions in our increasingly always-connected world. But today’s AOL is a reinvention of the early online trailblazer and purchaser of Time Warner. In today’s wireless environment, this deal is about attracting – and tracking – customers and, so, may have huge privacy implications.

In its announcement, Verizon said the deal is about:

• building digital and video platforms;
• Verizon’s LTE wireless video and over-the-top (OTT) video strategy (which Vox’s Matthew Yglesias translated to: video that Verizon Wireless subscribers can access on their phones, and streaming video that cord-cutting Verizon wired Internet customers can watch without a cable television subscription);
• supporting and connecting to Verizon’s Internet of Things (IoT) platforms, creating a growth platform from wireless to IoT; and
• scaled, mobile-first platforms offering directly targeted at what eMarketer estimates is a nearly $600 billion global advertising industry.

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

Verizon said AOL’s key assets include its subscription business; its premium portfolio of global content brands, including The Huffington Post, TechCrunch, Engadget, MAKERS and AOL.com, as well as its millennial-focused OTT, Emmy-nominated original video content; and its programmatic advertising platforms.

AdWeek’s Lauren Johnson highlighted six major assets from AOL's previous acquisitions:

• In 1999, AOL purchased MapQuest for $1.1 billion. While the mapping property has been hurt in recent years by Google and location app players, it still has tens of millions of monthly users, according to comScore.
• In 2005, AOL beefed up its content resources by buying Moviefone, a film tickets seller. The company made a big content push with the $25 million acquisition of Weblogs, which owned tech blog Engadget and Autoblog.
• In 2010, AOL purchased tech website TechCrunch for an estimated $25 million.
• In 2011, AOL acquired The Huffington Post for $315 million.
• In 2013, AOL bought advertising exchange Adapt.tv for $400 million.
• In 2014, AOL acquired Convertro — a marketing platform that helps advertisers track which channels churn out the most effective ads — for $101 million. The Wall Street Journal also noted AOL’s 2014 purchase of Web content personalization startup Gravity. Gravity creates a kind of digital fingerprint for Web surfers based on the pages they visit and the topics they discuss on social media sites and shares that information with Web publishers, who use those fingerprints to customize content for each new visitor.

A Content Deal — Or Something Else?

On first blush, many are thinking of this deal as being about content. Vox’s Yglesias wrote “this is basically a content acquisition. AOL's portfolio of media brands … produce videos that could be delivered to Verizon customers through Verizon's infrastructure, allowing Verizon to either charge a premium relative to competitors or extract extra value through ad sales.” AOL is now the third largest US online video content network after Google and Facebook, and is among the largest providers of premium streaming video content in the market. Recently, AOL said it planned to produce 3,600 original episodes of video content this year, a huge increase from 80 last year. “Verizon needs to feed the beast with some compelling content, and AOL has some of that,” said Peter Csathy, chief executive of business advisory firm Manatt Digital Media.

But $4.4 billion is a huge price for just content, no? And there’s already talk of spinning off the content like Huffington Post. So what gives? “AOL has not been overly successful in this arena, but what it does have is a very strong advertising sales force and ad technology,” Csathy said.

Back in March, Verizon Chief Financial Officer Fran Shammo announced that the company plans to launch a mobile over-the-top video offering this summer. The digital video service is aimed at families and younger viewers who increasingly consume content on mobile devices. Verizon made a deal for content from DreamWorks Animation and its AwesomenessTV unit that is known for creating popular content aimed at teens and younger adults on Google's YouTube. To gain the resources needed for the offering, Verizon made several acquisitions, including content delivery provider Edgecast , and is integrating Verizon's "OnCue" video streaming technology that the company purchased from Intel Corp in 2014 and its Digital Media Services technology, which formats content and splices in ads.

Shammo called the streaming offering “Mobile First” and noted that it has been in development for four years. Shammo said that the service may rely largely on advertising for revenue — an "advertising-type" model, "not necessarily a consumer-pay model." As the company crafts a revenue model for its new service, it is also contemplating "pay-per-view" options for live streamed coverage of concerts and sporting events as technology evolves, Shammo said.

Most Americans own a mobile phone, and Verizon is looking at online video delivery to increase data consumption on mobile devices and increase revenue. At the moment, except for Google and Facebook — which together control more than 55 percent of the $42.6 billion worldwide mobile ad market, according to eMarketer — few companies have managed to navigate the transition from desktop computers to phones. And, just to put this in some perspective, the smartphone industry is now shipping nearly three times as many devices as the personal computer industry did at its peak. Smartphones have led to more consumption of media than we ever thought possible; we spend just about half the time we’re not sleeping glued to some kind of screen.

The market for wireless carriers' core business is saturated, and a price war has erupted as the four big U.S. carriers — Verizon, AT&T, Sprint and T-Mobile — try to steal customers from one another. Meanwhile, high-value content providers enjoy full use of the carriers' commodity pipes. That's the pressure Verizon is under. That's why it wants to buy AOL.

McAdam, speaking about the AOL deal, said: “One of the challenges that big, incumbent companies have is inertia — the tendency to wait to be disrupted by new competitors, rather than being the disrupter. Strategically, we have taken a number of steps to shift our growth momentum and accelerate our move into new markets.”

Phones bring novel technical and user-interface challenges, some of which account for Verizon’s interest in AOL: How do you display an interesting ad on a tiny screen? On an interface fragmented by apps, how do you figure out who users are — and how to serve them with the best ads — as they switch from games to mobile web browsers to social platforms like Facebook, Twitter and Snapchat?

The rise of smartphones may also bring about something deeper — what could be an existential question for the advertising industry, the business that funds most of modern media. Andrew Bosworth, who heads Facebook’s advertising engineering division, wonders – if phones give us perfect information about everything wherever we are, why would we ever fall for ads? He believes advertising is valuable only if it provides direct meaning to customers — if, when you pull out your phone in New York City and check Facebook, the phone knows that you’re looking for food and presents you with an ad for a restaurant that cuts through the clutter of all your potential choices, instead giving you a recommendation that is tailored specifically for you.

People in the advertising technology industry said that in buying AOL, Verizon’s immediate goal may be to marry its data about customers to AOL’s capacity to serve ads to increase this sort of relevancy. Media conglomerates like Comcast and 21st Century Fox, meanwhile, have jumped into the business, snapping up ad tech companies of their own.

Verizon has the ability to identify users as they move between desktop and mobile devices. That data could solve one of the biggest problems plaguing digital advertising companies, which, due to poor functionality of cookies on mobile devices, have difficulty getting their targeting to work outside of desktop. Verizon is already dipping its toes into advertising technology in an attempt to put this data to use. Last year, it launched PrecisionID, a cookie alternative that works across screens, with a limited group of partners. AOL, for its part, has a powerful bundle of advertising technology software that is used to buy ads across the web. AOL says its advertising technology platform, called One, can help advertisers spend money on ad campaigns more effectively. AOL said the data-driven product lets advertisers see how consumers are reacting to their ads across devices, from smartphones to TV, so they can adjust their spending strategy accordingly.

If Verizon creates a single identifier and grants exclusivity to AOL's advertising technology platform, the result could be valuable for advertisers and lucrative for the combined entity. The goal is to streamline the disparate technology systems that marketers now use to plan and buy ads. Advertisers often needed to work with one company to buy online ads, another company to buy mobile ads and yet another company to buy data to help personalize and target those ads. If Verizon could integrate really good mobile ad targeting technology with its wireless infrastructure, it could conceivably gain a huge leg up on the competition. In effect, Verizon would derive more revenue from a Verizon subscriber than AT&T draws from an AT&T subscriber. That would let Verizon undercut rivals on price and create a flywheel where the growing size of Verizon's customer base increases the value of its ad platform, which makes it economical to drive further aggressive expansion of the mobile business.

The only other big player with a solid solution to tie user identity across devices is Facebook. Rich in login data, the company relaunched the Atlas ad server in September to take on this problem. AOL introduced technology to address the issue last October, but it's not as accurate as Facebook's. With Verizon, AOL may be getting a powerful trove of data. Through its cellular network and its various broadband offerings, Verizon can help AOL figure out lots of details about a user who lands in an app whose ads are powered by AOL’s ad services. The ultimate goal is to deliver on the long-awaited holy grail of digital marketing: targeting the right ad to the right person at the right time.

“It really is the next-generation media company that we’re creating,” said Bob Lord, AOL’s president. “This deal is about getting advertising and content to people where they want to consume it.”

In an age of consolidation between telecom companies, the purchase seems forward-looking to Craig Moffett, industry analyst with MoffettNathanson, who contrasted it to AT&T’s $47 billion stake in satellite service DirecTV. “AT&T will now be in the position of having to hold back the forces of change,” he wrote. “Verizon is to be commended for embracing them.” Moffett observed that the investment was tiny compared to Verizon’s capacity to spend, putting the company’s enterprise value at $350 billion. "By acquiring AOL, Verizon is pointing to a future where advertisers, rather than users, carry a heavier burden," said Moffett. "The strategy has the potential to drive not only usage but also market share in a way that is potentially more lasting and more fundamental than the string of more-data-for-less-money promotions that have dominated the past year," he added.

Dennis Berman writes in the Wall Street Journal, “This puts Verizon in a number of intriguing, if conflicted, new positions. It will have to be neutral arbiter in these advertising businesses, but also have to nurture and develop its offerings of online video and content. Does a phone company have the mettle and creativity to do this well? Does the prospect of a TechCrunch video show – brought to you by Verizon – captivate or horrify the average millennial? The answer is that no one has the answers. It is a war of all against all. Platforms against platforms. Content against content.” He adds, “Over the long-term it seems the benefits will accrue to the company that can stitch everything together – software, connectivity, content – into one undeniable package.”

Advertising Is The New Battleground

Verizon's investment isn't the only mobile advertising news we received this week. The Financial Times reported that several mobile operators plan to block advertising on their networks using blocking technology developed by Shine, an Israeli start-up. The software prevents most types of advertising from loading in web pages and apps, though it does not interfere with “in-feed” ads of the kind used by Facebook and Twitter.

“Tens of millions of mobile subscribers around the world will be opting in to ad blocking by the end of the year,” said Roi Carthy, chief marketing officer of Shine. “If this scales, it could have a devastating impact on the online advertising industry.”

The carriers' moves are setting the stage for a battle with digital media companies such as Google, AOL and Yahoo. Initially, we may see carriers offer advertising-free service for customers on an opt-in basis. But a more radical offering in the works would apply across its entire network of millions of subscribers at once. The idea, called "the bomb", is to specifically target Google, blocking advertising on its websites in an attempt to force the company into giving up a cut of its revenues.

But employing "the bomb" would raise serious concerns. Under network neutrality rules in the European Union and the U.S., carriers must treat all data that flow through their networks equally. And blocking advertising on mobile networks is likely to provoke a fierce backlash from digital media companies.

Roi Carthy of Shine said that eliminating intrusive adverts is a “consumer right”, even if it undermines the business model of online publishers that rely on advertising. “Online advertising is out of control and it’s polluting the user experience,” he said. Pop-ups, auto-playing videos and other forms of digital advertising can consume between 10 and 50 percent of a mobile subscriber’s data plan, he added.

In the Digital Age, If It's About Advertising, It's About Privacy

If Verizon-AOL is truly about digital advertising, then it is also about privacy. Privacy advocates are nervous about Verizon's efforts to gather more detailed personal information about its users for advertising.

"Whether or not the combination of a major online advertiser with the largest mobile-services provider raises substantial antitrust concerns, it raises extremely substantial and urgent privacy concerns," said Harold Feld, the senior vice president of Public Knowledge. "Verizon has already shown an alarming tendency to harvest private information from subscribers to bolster its foray into online advertising."

"With this acquisition, Verizon appears to be tearing down the wall between telecommunications and personalized advertising," said Jonathan Mayer, a computer researcher at Stanford University. "The FCC might have something to say about that."

Verizon’s advertising efforts have hit roadblocks in the past. A tracking “supercookie” used for targeted mobile ads drew an outcry from privacy advocates last year when it was revealed consumers could not opt out of being tracked. The company has since amended the program. “Verizon will need to tread carefully here given the privacy assumptions that most consumers and regulators will have with respect to mobile device activity,” says Brian Wieser, analyst at Pivotal Research Group.

Mayer argues that telecom companies like Verizon are "in a privileged and trusted position" because they have such sweeping access to sensitive information flowing over their networks, and it's often difficult for consumers to switch to competitors.

Jeff Chester, the executive director of the Center for Digital Democracy, warned that there are "disturbing privacy issues here as Verizon integrates its massive customer database into AOL's cutting-edge digital data-targeting system."

What Will Regulators Think?

The transaction will still have to win approval from either the Federal Trade Commission or the Justice Department. The Justice Department has traditionally handled major telecommunications mergers, including Comcast's failed bid for Time Warner Cable, but the FTC often focuses on deals involving online companies. The FCC is not investigate the deal because it won't involve the transfer of any FCC-issued licenses. Any regulatory review will focus on competition issues, but what about privacy issues?

Public Knowledge's Feld said the deal shows that the Federal Communications Commission needs to enact new privacy regulations on Internet providers like Verizon. “Following the reclassification of broadband as a Title II telecommunications service, the FCC began a process to consider how to apply the Title II privacy statute to broadband providers,” Feld noted, “The Verizon/AOL acquisition underscores the need for the FCC to move quickly to put basic privacy protections in place that recognize the unique and privileged access broadband providers have into our personal communications. Your broadband provider can see your every electronic bill-pay, your every online political contribution, and every website you visit or video you download. Consumers deserve the same protection they currently enjoy for their private phone calls for their private online communications."

The Benton Foundation will be tracking any review of the deal on our Verizon | AOL page. And we'll see you in the Headlines.