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Verizon's Video Play in AOL Deal No Sure Thing

We remain skeptical of Verizon's potential in video as established players, like Google, and new firms attack the market.

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Although the planned $4.4 billion acquisition of AOL AOL opens  Verizon (VZ) up to plenty of jokes about the dialup Internet access business--AOL still has 2 million such customers--this deal is primarily about the advertising platforms that AOL has built up over the past several years, especially around mobile video. Verizon is rolling out a new wireless video service, planned for this summer. Adding ad capabilities to this service makes strategic sense, but only to the extent that Verizon is successful in the video business. We remain skeptical of Verizon's potential in video, as we expect the number of quality mobile video offerings to grow as established players, like  Google (GOOG), and new firms attack the market. This transaction is small and could get smaller still if Verizon chooses to sell off portions of the business that it doesn't want. As a result, our fair value estimate and narrow moat rating are unchanged.

Verizon's new mobile video offering won't replicate the traditional television experience, but instead will feature a mix of live (primarily sports and cultural events) and on-demand programming designed to appeal to younger viewers. Verizon has said previously that it sees three paths to monetizing this offering: subscriptions, increased data consumption, and advertising. Adding AOL's ad platforms will expand Verizon's ability to capitalize on the advertising opportunity, providing its content partners with the ability to maximize the value of ad inventory available on the new service.

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Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.