The U.S. woke up to the news this morning that its largest mobile service provider, Verizon, would buy Aol, its longest-standing, if no longer pre-eminent, web portal. The tone among American commentators is split between jokes about America Online’s doomed Time Warner merger from 2000 and alarm at the notion of the phone company owning a large number of media outlets. There is concern about the platform that Aol will provide one of the country’s largest and most loathed corporate entities.
This dynamic is old news in Canada, where the convergence of telecom networks and content providers happened years ago. Bell bought Astral and its TV and radio stations; Rogers bought Maclean-Hunter and its fleet of publishing assets (including Canadian Business); both have launched streaming video services to compete with Netflix.
That Great Bundling happened first in Canada because we’re a small market, and that makes it hard to survive as an independent TV channel or a standalone radio station—or, of course, as a digital service, which is what every media entity is now. With our small, geographically far-flung population, it’s hard to build a media business to the scale that modern content economics demands. A large, deep-pocketed corporate parent is a significant competitive advantage.
At the same time, the telecoms see the danger of becoming “dumb pipes”: if all they do is shuffle data from provider to customer, then they add no value to the transaction, have no leverage, and command no premium. Once data becomes commodified, the only competitive weapon is price, which is brutal on profit margins.
When all networks are pretty much the same, providers need to differentiate themselves, and the way they do it now is content. That’s why Rogers spent billions on NHL broadcast rights; it’s why Fido is including a Spotify subscription with its wireless packages; it’s why Bell locked down HBO’s back catalogue of TV shows. Anything that provides an incentive for someone to become, or remain, a customer—such as easier access to a show or service or blogger they feel loyal to—is a competitive advantage for the carrier.
The market in the U.S. is bigger, of course—Verizon Wireless has more than 108 million subscribers. But it is facing the same pressures, and at far larger scale. Buying Aol may provide Verizon with a point of differentiation from its competitors; it also gives Aol’s properties—both its content-production and advertising arms—more direct access to a vast potential audience.
This is a defensive move on Verizon’s part, and it’s unlikely to be the last. It largely follows the script of what happened in Canada. And if we are a bellwether, then the U.S. can expect more of these combos to come.