Real reason Verizon spent so much to acquire Yahoo!

In a simple answer: It’s all about the advertising technology that could be combined with AOL! Or put another way: Why does a mobile telecom provider want to buy the core editorial business of a faded Internet portal? The short answer is advertising!

The deal, announced this week, marks the end of an era for Yahoo and is another piece of what has been a multiyear, $10 billion plan from Verizon to take on Facebook and Google, the biggest names in digital advertising.

Verizon is interested in buying Yahoo’s ad and content businesses for the same reason it acquired AOL last year for $4.4 billion. And that is to build the kind of scale that’s necessary to make money from digital advertising on mobile devices, as growth in the traditional telecom business slows.

“Verizon is trying to pivot its business from analog to digital,” analyst Craig Moffett of MoffettNathanson told the Wall Street Journal. “Verizon believes that a combined AOL/Yahoo would provide the digital advertising platform they need to execute their video reinvention strategy.”

Although it has failed to make much headway as a traditional digital-content company, AOL has managed to put together what analysts say is a fairly impressive combination of programmatic ad-buying and targeting tools—especially for video. That’s primarily what Verizon was interested in when it acquired the company. Since the acquisition, Verizon has added a number of other advertising-related businesses, including most of Microsoft’s ad-technology operations and an ad-technology company called Millennial Media that the telecom provider bought for $250 million. It has used some of that know-how to power Go90, the mobile streaming-video service it launched in October 2015.

“Just over a year ago we acquired AOL to enhance our strategy of providing a cross-screen connection for consumers, creators and advertisers. The acquisition of Yahoo will put Verizon in a highly competitive position as a top global mobile media company,” said Verizon chief executive Lowell McAdam in a statement.

Verizon has always been considered to be one of the most likely suitors for Yahoo, which has been officially for sale since April, after several years of failed turnaround plans executed under Marissa Mayer. With the deal, Tim Armstrong of AOL would in many ways be getting the merger he once wanted.

"Combining Verizon, AOL and Yahoo will create a new powerful competitive rival in mobile media, and an open, scaled alternative offering for advertisers and publishers," Armstrong said in a statement.

Armstrong, who heads Verizon's AOL unit, is expected to be a key player. A reading of his tenure at AOL offers some insight into what the future may mean for Yahoo, which would probably turn into a more focused advertising company. AOL is still heavily involved in media content, thanks to its ownership of the Huffington Post, but even with those businesses, it has kept a strong advertising focus.

Landing Yahoo would also provide Verizon with a sizable cut of the U.S. online market. Yahoo and AOL might not be trendy names, but they ranked No. 3 and No. 6 respectively in ComScore’s list of the top digital media properties in the United States in February. Add AOL and Yahoo together, and their unique visitors were 50 percent greater than No. 1 Google.

Verizon’s desire for Yahoo spotlights the grand scale of its ambitions: Not happy with just providing access to content, it wants to own a fat chunk of the online-content industry.

Consumers are migrating from simple email and Web browsing on their smartphones to rich mobile video and online games. And these data-hog services represent a lucrative opportunity to sell ads and, in some cases, could be a source of subscription revenue.

A review of the company's acquisitions over the past few years shows that Verizon has steadily brought on technology and content to help accelerate this strategic push in digital ad space.

Apart from the high profile acquisition of AOL last year that amounted to $4.4 billion, Verizon has also made a series of deals clearly aimed at bolstering its web video presence, including a joint venture with Hearst to acquire Complex; a stake in AwesomenessTV; and the purchase of Intel's internet TV service OnCue.

With an acquisition of Yahoo, Verizon will also be able to expand some content offerings, with the company lauding Yahoo's 1 billion monthly active users (including 600 million monthly active mobile users). But the strategic rationale for Verizon is probably something like four parts ad platform to one part content. Ad networks need scale, and for all of its other flaws scale is the one thing Yahoo still has. And now Verizon has it, too.