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Verizon's $4.4 billion AOL bet: Five reasons the deal makes sense

Verizon's purchase of AOL gives it the advertising and content strategy that it needs. Also don't forget Verizon can upsell AOL's 2.16 million subscribers.
Written by Larry Dignan, Contributor

Verizon's purchase of AOL for $4.4 billion, or $50 a share, opens up a new frontier for the wireless carrier and could pad the bottom line with advertising revenue.

Like any acquisition, time will tell if the deal is a boon or blunder, but Verizon has a pretty good case for the purchase.

Here's a look at 5 reasons why Verizon's AOL deal could work out.

Previously: Verizon to buy AOL for $4.4bn for mobile video, advertising

Eyeballs for Verizon's wireless video strategy. The talk in media and communications is so-called "over-the-top" applications that ride on the pipes of others. Netflix is the quintessential over-the-top service. If you own pipes---Verizon has FiOS---and wireless services content can work out well because you'll own distribution and eyeballs. For Verizon, the game is selling its wireless service as broadband for cord cutters.

Wells Fargo analyst Jennifer Fritzsche said in a research note:

Verizon has been focused on delivering over-the-top video via mobile, with plans to launch a service this summer focused on short form live content. Verizon has mentioned it had several options to monetize this new service, including an advertising model, a premium subscription model or via pay per view. With the addition of AOL, Verizon should be well positioned to benefit from an advertising model in which Verizon can gather valuable information for advertisers and content providers. This should provide Verizon a stronger bargaining position in the connected TV, mobile media and advertising sectors.

The U.S. wireless market is saturated and facing pricing pressure. Advertising could offset that pressure. AOL has key digital advertising platforms. Verizon doesn't know much about digital or mobile advertising. AOL brings assets that can be used to pad Verizon's bottom line. Verizon is being hurt by T-Mobile and Sprint marketing, but the bet for the wireless carrier is that its two smaller rivals won't be able to keep up the promotional activity without blowing up. AOL could allow Verizon to stay out of the discounting wars to some degree.

Tim Armstrong. Armstrong will stick around to run AOL and you have to give him credit. As CEO, Armstrong fixed AOL, made some big content bets, invested in programmatic advertising and now unloads the eyeballs to Verizon. Verizon will get an exec who will help the wireless giant figure out the mobile advertising space. Yahoo's Marissa Mayer may want to take notes. Yahoo will have to entertain takeover offers soon.

Verizon can up sell AOL subscribers. At some point, AOL access subscribers will join the 21st century. Verizon can transition those AOL subscribers to either FiOS or wireless service. AOL ended the quarter with 2.16 million U.S. subscriber with an average revenue per user of $20.83. Any up sell with AOL subscribers to Verizon services would increase average revenue.

$4.4 billion isn't a lot of money for Verizon to swallow. Sure, no company wants to throw $4.4 billion down the toilet, but even if AOL unravels Verizon will gain audience and platforms that would justify the deal. Yahoo paid $1.1 billion for Tumblr, which had little to no revenue. Microsoft once paid $7.33 billion for aQuantive, which was a digital advertising company. Years later, Microsoft wound up writing the purchase off as a clunker. Simply put, it's easy to find dumb money chasing acquisitions and the Verizon-AOL deal can be justified.

What's interesting here is how Verizon's strategy is going the other direction relative to AT&T's. AT&T has invested in owning infrastructure such as DirecTV. Verizon's bet is that the future is more infrastructure agnostic.

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