Verizon's deliberate moves into media have 'high execution/adoption risk': Barclays

Verizon’s ongoing spending spree in digital media is likely to produce incremental advantages rather than an immediate payday, Barclays analysts said.

The nation’s largest mobile network operator is looking to build a media empire through a series of acquisitions. Last year it bought AOL for $4.4 billion, and it may soon finalize its $4.83 billion deal to acquire Yahoo (although the future of that agreement is still uncertain following the major hack of Yahoo’s customer information). Meanwhile, Verizon recently bought the web-video startup Vessel for an undisclosed sum, and it continues to pursue Go90, an OTT video offering aimed at young mobile users.

Those transactions are small, of course, compared to AT&T’s proposed $85 billion takeover of Time Warner. But both carriers are clearly looking to generate content and advertising revenues to offset slowing growth in the U.S. mobile market. Verizon’s strategy appears to be more moderate to enable the carrier to monitor consumption trends in a fast-moving market, Barclays analysts wrote.

“While to some Verizon’s MediaCo strategy seems piecemeal, our deeper exploration suggests a deliberate multiyear initiative designed to 1) address how it believes media consumption will evolve, and 2) fit with its broader expectations around network evolution,” the analysts wrote in a research note to investors. “Specifically, the company’s goals are to embrace content tailored towards new forms of consumption/creation, open up additional revenues for revenue growth at the service layer (advertising, etc.), shift away from current content cost structures towards pay per use, embrace OTT distribution, and create a framework in supporting new content options that can possibly rival those provided by cable operators.”

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Indeed, Verizon has some important pieces in place as it seeks to expand beyond its traditional telecom business. It has powerful advertising weapons in AOL and Millennial Media; a broad base of mobile users in the U.S. and Yahoo’s worldwide distribution footprint. Crucially, it also will be able to access vast amounts of data to deliver highly targeted—which means highly lucrative—ads to consumers around the world and across devices.

Google and Facebook are the two dominant online advertising platforms in the U.S., of course, and Verizon has made no secret that it hopes to make a run at the No. 3 spot. Putting all those pieces in place will require nearly flawless execution, though—and it won’t result in huge new revenue streams overnight.

“Although MediaCo will likely face tough competition and high execution risk, in the mid-term we believe its strategy can still benefit from a large and growing digital ad market, even if it remains in a distant third position,” Barclays said. “That being said, the initiative is unlikely to drive a material financial benefit for several years and still comes with high execution/adoption risk. Thus we believe its strategy bears monitoring as the divergent video/media strategies of all distributors—all still unproven—will clearly drive meaningful longer-term competitive implications.”