Verizon just payed more than a $1 billion premium over the market value of AOL's business in order to acquire it. That's a 25% increase.
Do you remember the last time you were willing to pay 25% more than the sticker price for anything? I bet you can't name even a single instance in the last 5 years. Except maybe concert tickets. So why the heck did Verizon (which would likely require Board approval) do it?
The answer, friends, is incredibly simple. Follow the money.
How does Verizon make most of its money? They sell everyday people internet service for a monthly fee, either through wired landlines or over wireless cell networks.
Now, what aspect of that do most people use? Telephones? Nope. Texting? Yes, but it doesn't require much "internet". Data? Bingo.
And what things that you do on your phone use more data than anything else? Emails, phone calls, texting? No, no, and no.
Video. That's what.
And with the brand new mobile live streaming wars heating up faster than any other startup war I've ever seen, the sheer volume of data flowing over cell networks is going to require additional capital investment to handle it, as well as some way to make more money from it.
Are everyday people willing to spend more for their data allotment in their monthly cell phone bill? Highly unlikely.
Which means the only way a business can make money is through advertising. And AOL is the one company big enough that has both a video platform and ad platform built over many years at internet scale.
As I've delved deeper and deeper into the digital video industry over the last few years I've often thought about how carriers would try to harness and monetize this massive amount of video data that will be flowing through their networks over the coming years. Just the enterprise video market alone is set to triple in the next five years from $13 billion to $39 billion (MarketsandMarkets).
You better believe it's the only conversation that matters in the Board rooms of Verizon, AT&T, and SoftBank (which now owns Sprint). The answer? Offset CAPEX with video ad dollars.
Facebook's mobile ad efforts will need video (it's the fastest growing aspect of their social network).
But with Facebook and MLBAM (HBO Now, MLB At Bat) building their own video platforms, how can Verizon block that data from being delivered over mobile devices? Well, it just can. Consider it a paywall, not for newspapers, but for highest trafficked sites.
Imagine if you're a customer of Verizon and Facebook just stopped loading one day on your iPhone. You would hate it. What if Verizon charged you directly for packets being sent over the Internet? Or if Verizon threatened Facebook and made them pay a percentage of their ad revenue?
Or what if Verizon injected native ads into data delivered over their cell networks? There is nothing that Facebook's hundreds of billion dollars could do about it. Except urge you to move to AT&T.
But then you've entered a period of collusion between wireless providers blocking access to any data delivered over their networks unless you pay them a toll, and all the major sites would have to pay them a toll.
It sounds crazy but what if the cell networks stop making money or profits to continue investing in infrastructure and technology? That means they can no longer pay their people, which means their families go hungry. And before shareholders, executives, and employees would allow it, they would create a paywall, just like we saw with the news industry. A drastic, but necessary step in order to stay in business. Because somebody's gotta pay. Either you in your monthly bill, or advertisers who want to target you.
Verizon + AOL = Mobile Video + Ads
Meerkat and Periscope need to watch an episode of Game of Thrones. Because winter is coming.
Sean Everett is Product Manager for Piksel Digital Enterprise™, an enterprise-grade online video solution that leverages many of the components of the Piksel Palette. He is devoted to humanizing new technology and has built multiple apps, from consumer startups to algorithmic trading. Connect with him on Twitter @SeanMEverett.
Originally published on Quora.