Loaded With Data, Verizon's AOL Looks up at Giants -- and Takes Aim

Ambitions Hinge on AOL's Ad Tech, Verizon's Data and Their Combined Scale

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As one of AOL's largest advertisers, Verizon knew the company's advertising business well, strengths and weaknesses, even before it agreed to buy the portal for $4.4 billion earlier this year.

"The performance of the ad product was significantly greater than what we got anywhere else. The challenge that we had is that there was never enough scale or inventory for us to buy," said Marni Walden, exec VP-president of product innovation and new businesses, Verizon.

So Verizon decided to buy AOL -- all of it.

Verizon wasn't only looking to buy ads but also sell them. The telecom, internet and pay-TV giant's core business of selling access to its internet, cellular and TV networks "will always be important to us, but one of things we think a lot about is how do you monetize above the access network," Ms. Walden said.

Verizon had begun to assemble a media business through its content-delivery systems Edgecast and Uplynk and its data marketing arm called Precision Market Insights and would be adding a streaming video service that it had acquired from Intel, which it unveiled earlier this month as Go90. But it needed ad tech to turn those businesses into real moneymakers. "We tended to think about having all of this oil in the ground, but we didn't have the rig to bring it up. So AOL and its ad-tech capabilities were that rig," Ms. Walden said.

Sometime between 12 and 18 months ago -- roughly the same timeframe that AOL was contemplating a deeper pivot to mobile -- Ms. Walden and AOL's CEO Tim Armstrong began discuss different ways the two companies could work more closely together, such as a joint venture. "It didn't probably get as heated until probably the end of last year. Then the full decision for acquisition happened shortly before we did the deal," Ms. Walden said. The rationale for that decision was fairly simple, to hear Ms. Walden tell it.

"If you think about how the model works, bringing scale to their platform is what they desperately needed to make that business compete in the top three," said Ms. Walden, positioning AOL alongside digital media juggernauts Google and Facebook. "And we believe that Verizon brings that."

There's a punishingly long way to go before AOL truly reaches that plane, but Verizon's plan is clear. It starts with bringing AOL into the mobile landscape, where it's largely been absent while Facebook and Google have plunged big stakes in the ground.

Google and Facebook "are sort of native mobile companies," said Jordan Bitterman, chief strategy officer at the media agency network Mindshare. "And AOL was never going to get there by evolving the company. They had to buy it and be bought by it."

In the months immediately before and after the Verizon deal closed in June, AOL signed a slew of deals to increase the amount of inventory it could sell to advertisers and gain a foothold in mobile. It struck a video programming deal with NBC Universal, signed a 10-year display ad and search deal with Microsoft and agreed to buy mobile ad network Millennial Media.

AOL had vast content and online reach, Verizon brought 109.5 million wireless subscribers in the U.S., and Millennial Media had access to 65,000 apps and tons of mobile login data, said Wenda Harris Millard, president and COO of advisory firm MediaLink and former Yahoo sales boss. "If you look at that combination of vast inventory and matching the data to target and serve advertising to the same people via desktop, mobile and addressable TV, that's a big story," she said.

But there wouldn't be any story if not for the work AOL had also done over the past few years in assembling its ad-tech stack, which attracted Verizon's attention and will undergird everything that Verizon and AOL look to accomplish.

When Razorfish's then-global CEO Bob Lord joined AOL as head of its ad-tech arm in July 2013, the portal's ad-tech business was in its "1.0" stage, said Mr. Lord, now president of AOL. "It was all focused on the [real-time bidding] market," referring to the eBay-style auctions hosted by computers that would let other computers bid to buy ads across multiple sites in the blink of an eye.

Over the succeeding two years, AOL has upgraded its ad-tech arm through a flurry of acquisitions, including video ad network Adap.tv and analytics firm Convertro, to add to the products it already had in place, such as its automated ad-buying and ad-selling tools and its ad server. Earlier this year, AOL formally combined all of its ad-tech assets into a one-stop ad-tech shop called One by AOL.

At the same time that AOL was piecing together its ad-tech stack, it was connecting the data dots across the stack's various assets as well as across the larger AOL in order to better target and measure ads and personalize content.

After unifying its ad-tech data for better targeting and more accurate measurement, it began incorporate other data. It added data from ContentLearn, its product that determined what to show on the AOL home page, and eventually data from Gravity, the content personalization firm AOL acquired in January 2014. Then it added a Convertro-powered data management platform that would crunch data to assess where marketers should spend their money as well as TV set-top box data through its PrecisionDemand acquisition.

"What you have is a flywheel that you're seeing that gets faster and faster and more useful as more data gets added to it," said Seth Demsey, chief technology officer for AOL Platforms. And now AOL gets to add Verizon's customer data, which includes authenticated demographic information and real-time locations.

Gaining access to Verizon's anonymized customer data "was really essential. That will be our key sustainable competitive advantage for a long time to come because it's a persistent data record that not only provides me with information around content consumption but also the context that somebody's in and the behaviors they have," Mr. Lord said.

Mr. Demsey declined to discuss details of how AOL plans to use Verizon's data, but one possibility seems obvious. When it comes to mobile ad targeting and measurement, location is as valuable a signal as someone's age or gender. Problem is, location data has historically been pretty bad. "There's a little distrust around the accuracy of location data," said Andrew Casale, CEO of publisher-centric ad-tech firm Index Exchange.

An ad-tech company may be able to identify where someone is one minute, but it will keep targeting that person with ads based on that location days later when the person has moved on to somewhere else. That's because those companies are "a few steps away from the source [of the location data, and Verizon is the beginning of the source," said Forrester analyst Richard Joyce, referring to Verizon's network-level data. "It has the potential to be very powerful."

But that data is only as valuable as AOL's ability to use it to find places to put those ads. Until the acquisition of Millennial Media closes, AOL's mobile footprint is relatively small compared to giants like Facebook and Google. All of AOL's desktop and mobile properties combined to reach 170.7 million people in the U.S. in August 2015, a 6% drop year-over-year, according to comScore. While AOL CMO Allie Kline said two-thirds of AOL's traffic is mobile, the company doesn't generate enough mobile revenue to appear on eMarketer's list of U.S. mobile ad revenue share, according to the research firm. When the acquisition of Millennial Media closes, that will change somewhat. Millennial Media is estimated to rake in 0.3% of the $30.5 billion U.S. advertisers are expected to spend on mobile ads this year, per eMarketer. By comparison Google will take in 32.9% of that money, Facebook will take 19.4% and Yahoo will take 2.9%.

That's why AOL has been assembling what Mr. Lord described as its "content stack." In addition to the NBC Universal deal, the company is looking for its deal with Microsoft -- to handle ad sales for Microsoft's properties like MSN, Skype and Xbox and which brought 940 of Microsoft's full-time ad sales employees and contractors to AOL -- to add more content and inventory it can sell and shore up the scale issue that Ms. Walden had mentioned.

In particular, AOL is focusing on video as a way to grow its mobile audience and revenue, Mr. Lord said. "We know that we need a lot more video on our properties," said Jimmy Maymann, Executive VP and President of AOL Content and Consumer Brands.

At its Digital Content NewFronts presentation in April, AOL execs said the company plans to create more than 3,600 video episodes, 45 times as many episodes as it produced last year. And it's continuing to increase both the amount of video it produces and the places through which it can distribute those videos. The company will distribute some of its video programming through Verizon's mobile-first video service Go90 and is expected to support the ads that will run on the service, though execs from neither AOL nor Verizon wouldn't go into details on those plans. The NBC Universal deal will bring some of the Comcast-owned conglomerate's TV shows to AOL and offer AOL opportunities to bring some of its own programs and talent to TV.

Similar to how Facebook decentralized mobile and threaded it throughout the company, AOL is doing the same with video. Last week the company ousted its head of video Dermot McCormack, who had been at the company less than a year but joined before Verizon bought the company and spurred AOL's broader overhaul. AOL's VP of Originals and Branded Entertainment Nate Hayden is taking over as the company's de facto video boss and will report directly to Mr. Maymann, according to an AOL spokeswoman. But Mr. Hayden won't be the only face of AOL's video business as its various businesses take on more video responsibilities.

For example AOL will lean on the Huffington Post to fill up its video library. Despite reports that AOL would look to shed the news site, "that was never the plan," said Mr. Maymann, who had been CEO of Huffington Post before being promoted to oversee all of the company's consumer brands in August.

On Oct. 19 the Huffington Post will premiere "HuffPost Rise," a 10-minute morning news show that will stream live on the Huffington Post's home page five days a week and also have an emailed version with a 90-second video news digest. "HuffPost Rise" will bookend its news round-up with an opening inspirational message and a closing call to action to get involved or donate to a charity or nonprofit organization, in keeping with co-founder and editor-in-chief Arianna Huffington's emphasis on balancing negative news coverage with more positive messages.

"HuffPost Rise" will join the Huffington Post's growing programming slate. The site already produces shows like HuffPost Live -- which outputs eight hours of live programming a day that can be edited into 500 clips to populate AOL's properties and averages 100 million to 130 million streams a month, per Mr. Maymann -- and struck a deal over the summer with digital video network BroadbandTV to erect a video network of citizen journalists, as it gets ready to launch its 24-hour video network HuffPost 24.

"As we are moving towards what we are calling HuffPost 24, which is 24 hours of programming, we want to capture the whole spectrum," Ms. Huffington said. And AOL's hope is that more content -- from the Huffington Post, NBC Universal and Microsoft -- will capture more ad dollars.

"Now I have simplified two things for a brand advertiser; No. 1, I'm providing you potentially one automated programmatic stack, and now I'm the company that's going to help you pool audience access to simplify your buying," Mr. Lord said.

It will take time, however, to see if simplicity can help AOL's sales. Considering that eMarketer projects AOL will receive 0.7% of the $170.2 billion advertisers will spend on digital ads worldwide this year—compared with Google's 30.4% share and Facebook's 9.6%—the company has leagues to travel before it can legitimately be considered on par with the two digital ad goliaths.

Through the Verizon, Microsoft and Millennial Media deals, AOL's share of global digital ad revenue will likely go from "less than a percent of revenue to something that is probably two-and-a-half times that," Mr. Bitterman said. "So it's not going to get them close to Facebook. It's certainly not going to get them close to Google."

AOL and Verizon may have to settle in the foreseeable future for just getting closer.

Amid major media agency reviews being conducted this year, agencies have incorporated AOL's ad-tech products and content offerings into their pitches to big brands looking for partners to help them spend their budgets, according to Mr. Lord. "The NBCU-AOL relationship was central to one of the proposals," he said, declining to name the agency or brand involved. "I haven't heard the outcome of that yet, but we were in the pitch at least."

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