a16z Podcast - a16z Podcast: Verizon Plus AOL -- Why? -- The Short Answer is Mobile

Episode Date: May 12, 2015

The battle of the pipes has shifted to mobile. Verizon caught plenty of people by surprise when it announced it was buying AOL for $4.4 billion in cash (the cash part deserves a short moment to sink in). The question plenty of people are asking is, why? “Mobile,” says a16z General Partner Chris Dixon on this segment of the pod. “Increasingly it’s probably also mobile video.” a16z’s Frank Chen joins Dixon to discuss the Verizon acquisition, and what might be the start of a fresh wave of buying as network providers like Verizon look to wedge their way further into both mobile video and the advertising technology that helps pay for it. “Everything is up for grabs in the video-to-mobile value chain,” Chen says. “Verizon sees it, and they want to be at the front of it.” The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Welcome to the A16Z podcast. I'm Michael Copeland, and I am sitting here with Frank Chen and Chris Dixon. Welcome, guys. Hey. Hi. We are here to discuss Verizon and AOL. 4.4 billion for AOL. What does that say about Verizon and the carrier business and what does it say about AOL's business? Yeah, I mean, if you'd ask me this morning before I saw this, the likely acquisition today, this would be not on the list or not on the list. It was surprising.

I think the short answer to probably every tech M&A you see anywhere for the last five years is mobile. right you can pretty much answer any you can go to any tech cocktail party and just answer everything with mobile and you'll sound like you know what you're talking about i think increasingly it's probably also mobile video um is is the answer to all these things so somewhere there's a you know there's a power probably a mackenzie PowerPoint that has the words uh mobile video programmatic advertising synergy um user tracking etc which you know was the the kind of justification for this um the uh you know the the the you know the the the I think there's sort of broadly like sort of a positive and a negative kind of spin on this. The positive spin is, you know, Verizon sees the future, which is, you know, the cable bundle is going away. More and more, you know, it's like millennials now. It's something like the stats are like five hours a day they spend on their mobile phones. It's going to be all of their time on the mobile phone. Video, you know, TV is going to move to the mobile phone.

HBO has already gone on bundled. Sports is going to go unbundled. I remember that Verizon. did the NFL deal last year, right? Which is for their premium subscribers, you could get any NFL game streamed to your phone. That's right. And so they want to be at the forefront of this,

and they want to be a dumb pipe. Exactly. So they're trying to layer value on top of what they are there. Which is the classic, I mean, this is just the class, the pipe, this is the classic, you know, the battle of the pipes, right? I mean, Comcast, remember years ago they bought, it was like Taley Candy, Fandango, and Plaxo, believe it or not,

in their content of... I'm still getting Plaxo request. to update my book, I think. I know. So, I mean, you know, so there's always, so the cynical view is this is always the dream of the dumb pipe to become the, you know, the smart pipe or something. The positive view is these, they're seeing the future and the future is mobile phones and they're getting ahead of it. And if it's as big as probably we think it's going to be, even if they may be overpaid somewhat and maybe bought the wrong company or something, they still are probably on the right track. So you can argue the price.

You could even argue the company, I guess. But then let's not argue the company. What does AOL bring to a variety? that Verizon wants and needs? I mean, I think it's, so the smartest interpretation I saw was ad age, which said it's not about the content. I don't think it doesn't make

sense that it would be the Huffington Post and TechCrunch and things. Their argument was so much of the online ad industry was based on cookie tracking, so tracking user sessions, and that now people are multi-device and a lot of these devices don't allow cookies, and that Verizon would be able to say,

oh, look, this is the same person that was on his or her phone, now they're on the iPad and they're on a different app and a different website. And so they would have this special ability to kind of mix their Verizon data network user tracking together with AOL's ad tech. I don't know, Frank, if that's how you just looked so. Yeah, so there's ad technology. There's also sort of video production technology, which is if you think about how videos are going to be created, compare and contrast, sort of, you know, how is Game of Thrones funded and created, right?

HBO Studios funded it. and there was a massive studio effort to create this. What we're moving towards is a world in which most of the video content will get crowdsourced, right? There will be an independent showrunner or video producer. They do small shows, right? And then they go into AOL studios. They actually have HD studios to create their content. And then AOLS studios can also bring distribution, right?

Wait, let me just back up. When you say crowdsourced, do you mean that the ideas kind of get validated by the crowd, not necessarily created by the crowd? Well, we're moving to our world in which the crowd might actually fund their favorite shows. So instead of studios, right, somebody will get money from 1,000 fans, that somebody will walk into AOL studios, produce their thing, and then AOL and Verizon can now bring distribution, right, for that brand new video content. So I think if you look at the historical view, and monetization, right, sort of the ad tech who watched how many, right, what counts as a watch, right, 30 seconds a whole minute, right? So if you think about it from the historical point of view, which is how I like to think about these things, everything is up for grabs. in the video to mobile value chain, right? How are we going to fund the shows that we watch?

How are we going to distribute the shows that we watch? How are we going to discover the shows that we watch, right? That entire value chain is going to get upset. And I think the positive to spin to put on the Verizon AOL deal is they see it and they want to be at the front of it. Yeah, I think, I think to echo that, that it's sort of like now it's 1995 and instead of the newspaper industry, it's the TV industry, right? Like it's about to be, you know, if, according to this,

sort of bullish view, internet bullish view, it's about to, the tsunami's about to hit. Right. And, you know, you need to sort of get, you know, get ready for it. I mean, it's also interesting that now, you know, it used to be that these companies would more kind of stay in their lane so you'd have the sort of the different layers of the network. It's now kind of just total war where everyone is fighting everyone, you know, Google and Facebook are building internet access and Verizon is getting into content and they're getting into TV and they're just, you know, so there's no, you know, in some ways all bets are off and

no one stays in their lane the way that they used to. I was going to say like Google launched their MVNO, Google Fi, so they're sort of getting into Verizon's face and business. Does Verizon now know something though as a carrier that, you know, and as a pipe that other tech companies who are in this space kind of don't know? Well, controlling the smartphones, you know exactly who your users are, where they go to sleep, which means that wherever your cell phone went to sleep is probably where you live. So they know the zip code of where you live. So they do know a lot of things about you. The question has always been, should there be a Chinese wall between network operations, which knows that stuff, and an advertising business, which could take

advantage of that stuff. And that'll be a question to be settled here, which is, I know exactly where you are and where you live and where you go. And I know where you are at any moment in time. In the darker theory, I have to wonder if this is at all related to the net neutrality stuff. the um well there's a couple of regulatory things that fit in one is uh you know if you go a lot bigger than aol or you know at some point like this is probably the biggest company you can buy and not have major regulatory oversight number one and then like so that's number one and the number two that is like in a world where you net neutrality is banned um is this more is it are you are they looking for workaround so like the big the most popular workaround for

net neutrality is um zero rating it's called which is uh which is a flagrant by violation of natural. It's just somehow they've made it look like it isn't. But it's basically saying, hey, we'll give you free internet access for our websites and you have to pay normal rates for everything else. You know, with with this and potentially you're you could do, you know, you can imagine their content. I don't know what. You know, you get your, you get your, you get your, your data caps on Verizon waived for all the AOL content and, you know, I don't know how and and, and if you, if you run your ad network through our system and share revenue with, us, you'll have better user tracking.

And you know, you can imagine a lot of ways in which the network and the content and the monetization interact in, you know, quote, synergistic ways, which the whole point of the net neutrality debate was to avoid things like that. Right, right. I like your preamble. In a world where net neutrality is banned, it sounds like a movie, I'll be a bad movie, but still. I wanted to go back to your comment about people staying out of each other swim lanes,

and that's over. Like, the battle has all, people have always gotten into each other swim lanes, so let's go back sort of in history. You might have listened to the RSA, RCA, symphony orchestra, which was funded by RCA Victor on an RCA radio, like manufactured by RCA, right? So the person who manufactured the device,

the distribution, the creative agency, and the art, like they were all singly integrated, right? And so you get used to whoever is, in that swim lane, right, sort of where you grew up, that there's always been massive battles over who's going to fund this content? How will you discover it, right? What device will you listen to it on? And this is just the latest manifestation of that. I think there used to be, though, more, I think in the business theory world, a stronger belief in kind of core competency. And that people, you know, it was sort of the, it was, it was the Microsoft model as opposed to the Apple model, right?

it was like let me do one thing well and like I'll own this strategic point and I'll let other people do the work around me and now you know it's the Apple model which is I want to own a whole bunch of different things interlock and and create the optimal experience Chris I want to get to something that you tweeted you said waves for ad tech emanate sort of gone one display two social three mobile four TBD so like the first wave I think it was there was double click which Google bought and then immediately the Yahoo bought right media for, you know, approaching a billion. And then I think there was a third one at the time.

And so it sort of basically, you know, shot gets fired. First thing happens and then suddenly everyone pairs up. And I was an angel investor personally in a bunch of ad tech companies in the past. And my advice is always when that happens, you got to like, it's like musical chairs. And if you don't get a seat, you know, you're probably screwed because now these guys are all part of, you now have a direct competitor is now part of Google and part of Facebook and part of whatever other dominant, you know, incumbent is there. So it happened in display with double-click. It happened. Social was what buddy media and wildfire.

And I'm forgetting there's two other Oracle that bought one, right, Virtrue or something. And then in mobile, it was AdMob and Quatro. I don't know if there was ever an SEM wave. I don't think there was a big goal out. Those never really got bought. I think because they were all just so dependent on Google, there was only one kind of incumbent. So if I were an ad tech entrepreneur or advisor right now, I'd be thinking, is this going to be, you know, because the way big companies operate, they kind of ignore our VC world. Like we think we're, you know, we get all this, we think we know we're important in the center of the world.

In fact, most people don't really care and the big companies really don't care. And they think, oh, those VCs are all insane until something gets really big. And until, specifically until one of their peers takes action and like crosses over into our world or something. And so I'm sure there are meetings going on at all of Verizon's competitors and anyone, you know, including internationally now. And they're all thinking about like what's going on here. What's our strategy? Are we getting outflanked? And so, you know, it's just interesting to watch.

Like, I don't really have a dog in this fight. But so this is this, this is a continuation of sort of the mobile M&A wave? Or is this kind of the beginning of a new wave you think of, of acquisition? Yeah, I mean, I think, well, so the mobile, you know, it's also complicated. That particular mobile wave, my impression was a little bit of a, I don't know, Frank, what you think. I feel like that was kind of actually fizzled out. Like, I don't think those two companies are actually in. Yeah, I think the mobile ad tech wave kind of fizzled out.

And then what got popular was sort of mobile production, mobile apps, right? How do I create videos and then apps, right? Yahoo went on a buying bidge and they bought 20 of these things. yeah I mean because the the mobile ads the prior mobile ad wave was predicated on the notion that ads would become a dominant monetization model on mobile which they actually haven't really it's been more paid and so that was sort of in some ways a false start I think now there is it is again mobile but it's much more around like mobile tracking and attribution and probably some kind you know if you have like a network of apps that use your you know that that that use your your your program programmatic ad buying service things like that well so it'll be interesting to see then if you know we're starting another game of musical chairs like you say and um things will get busy for people on the carrier side and all the competitors to verizon and then others who might compete in the ad tech space as well yep frank chris thank you guys okay thanks