AOL: You’ve Got Mail Merger

verizon and aol merger art composite

AOL: You’ve Got Mail Merger
| published May 14, 2015 |

By Thursday Review staff

Laugh it up trendsetters, gadget hipsters and acolytes of the absolute latest in cutting edge tech. AOL has the last laugh.

Once relegated so deep in the trash heap of tech history, it seemed buried below even eight track tapes, My Space and those avocado kitchen wall phones with the clear plastic dials and the ten foot curly cords, AOL is back in vogue—and in demand.

Verizon is paying $4.4 billion to buy AOL, primarily for the online service’s video streaming and its powerful online advertising components. AOL shareholders will receive a payment of $50 per share when the deal concludes sometime in the middle of next year.

Tim Armstrong, AOL’s CEO and the person largely responsible for shepherding the New York-based company back from the brink of extinction, is proud of the turnaround.

Back in its heyday, America Online grew almost as rapidly as the internet itself, and, along with other early dialup email platforms and web pioneers like CompuServe and Prodigy, once maintained a hold on roughly one third of all email users in North America. AOL was everywhere, most especially in those ubiquitous floppy discs that came packaged inside nearly every new computer sold in the 1990s. If you bought a computer in those days—any computer, made anywhere—you got one of those AOL sign-up discs with the offer of X number of “free hours.”

And in those heady days before Facebook, before You Tube and before Twitter, the sound of that voice announcing “you’ve got mail” meant that you were connected to an internet already growing faster than anyone could have predicted.

By the middle 1990s, AOL was so large and so omnipresent, it had the muscle and moxie (and cash) to buy Netscape, and to enter into a huge merger with Time Warner. Yes, that’s the same Time Warner that just saw Comcast walk away from the alter last month after a 15 month engagement in what would have been the biggest media merger in world history. But the AOL-Time Warner marriage ended in divorce, and became the textbook example of bad mergers.

But AOL has made something of a comeback, channeling so much content and so much eye-catching material to its pages and its video platforms that it has become the envy of other communications giants. In fiscal 2014, AOL came in fifth out of all online media operations in total sales, ahead of Linked-In, the New York Times, and even Twitter. Take that, tech savvy hipsters.

AOL has also managed to get itself out in front of the complex algorithms that match searches and browsing preferences with advertisers, promoters and publishers, quite possibly the most lucrative component of online money, and the piece of the pie which drawn the biggest attention of Facebook, Twitter and Expedia. In 2013, AOL bought, a tech company with the ability to write programs which matches appropriate video content with the right advertisers—a sort of eHarmony for monetizing content partnerships. AOL has also greatly expanded its news reach through lucrative partnerships with the Associated Press, Huffington Post, and other news sources. And AOL has also entered into mutually money-making arrangements with NBC Universal, the E! channel and Bravo—to name but a few—to channel video content directly to the web through AOL’s various sites. In addition, AOL has launched some of its own original programming, much of it already available using apps for smartphones and handheld devices. And it will partner with other TV creators to develop scores of additional original programs and series.

In short, AOL has made itself relevant despite those sarcastic predictions that the last paying subscriber would be sent an email to turn out the lights when they leave the homepage for the last time.

Verizon wants what AOL now has—all that rich variety of content—news, reviews, video, games, programs—already neatly packaged and bordered with appropriate advertising, much of it in the form of short videos. Verizon also seeks to stay ahead of the inevitable curve toward handheld and tablet content and smartphone apps, now the fastest growing component of internet activity. While giants like Comcast, Charter and Cox do battle to see who can control those broadband lanes, Verizon sees itself as uniquely positioned to channel the power of the smartphone into revenue.

AOL lost much of its dominance when hundreds—then thousands—of services began offering free email. After Google, Yahoo, Hotmail and other major players flooded the market with free email applications, figuring correctly that they could make more money from other activities and from advertisers, AOL watched as “subscribers” began to migrate away. Furthermore, the big broadband providers by that time almost all offered multiple email accounts, sophisticated homepages and browsing functions. Customers who signed up for internet service with Comcast, Time Warner, Cox, Charter, Bright House, Knology, etc., all had many of the same services that AOL offered—only cheaper, and generally packaged in with TV and phone.

AOL began its life in the early 1980s as a company called Control Video Corporation—a remarkably cutting edge firm which facilitated, of all things, the using dial-up modems and telephone lines to connect computer gamers in real time. This deal brings AOL very nearly full circle, and brings to a conclusion Armstrong’s long struggle to make his company so relevant again that the major players now want a piece of AOL’s action. For Verizon, the move signals that the cell phone giant intends to do battle with Google, currently the industry leader in connecting advertisers to content.

In the meantime, vestiges of the old AOL still remain stubbornly intact. Among those oddities, at least 2 million people who still use AOL as a dial-up service, not as a component of their broadband or DSL provider. Most of these customers live in rural areas still largely outside the reach of the major broadband providers like Comcast, Time Warner and Charter, or live outside the range of high speed DSL service.

Verizon and AOL expect the merger, if approved by the Congress and Federal regulatory agencies, to be completed in about one year.

Related Thursday Review articles:

Comcast Time Warner Merger Scrapped; Thursday Review; April 25, 2015.

The FCC Rules on Net Neutrality; R. Alan Clanton; Thursday Review; March 5, 2015.