Verizon's AOL Deal Could Lead to New Privacy Problems

Verizon's $4.4 billion purchase of AOL isn't really about obtaining The Huffington Post or AOL's 2.2 million dial-up subscribers. It's about advertising.

Industry analysts think the company's goal is to use AOL's technology to deliver more finely targeted video ads.

That fits with AOL's recent direction under CEO Tim Armstrong, who previously led Google's sales unit. Armstrong, who Verizon said it plans to keep as the head of AOL, has invested heavily in advertising, including paying $405 million in 2013 for Adap.tv, which connects buyers and sellers of video ads.

"We can envision a scenario in which Verizon leverages AOL's ad-tech platform to target consumers and measure their engagement across traditional and digital video, and measure and deliver interaction across its multiple devices, platforms, and properties," Craig Moffett, a telecom-industry analyst, wrote in a note to investors.

He said the deal "speaks to a possible sea change" in the wireless industry. Skyrocketing data usage has not translated into much rising revenue for the cellular carriers, Moffett wrote.

Verizon, he predicted, may be betting that the real money will be in delivering advertising to its wireless users. That strategy would likely tie into Verizon's plans to launch its own online-video service in the coming months that will focus on mobile devices.

But privacy advocates are nervous about Verizon's efforts to gather more detailed personal information about its users for advertising.

"Whether or not the combination of a major online advertiser with the largest mobile-services provider raises substantial antitrust concerns, it raises extremely substantial and urgent privacy concerns," said Harold Feld, the senior vice president of Public Knowledge, a consumer-advocacy group. "Verizon has already shown an alarming tendency to harvest private information from subscribers to bolster its foray into online advertising."

Feld said the deal shows that the Federal Communications Commission needs to enact new privacy regulations on Internet providers like Verizon.

"With this acquisition, Verizon appears to be tearing down the wall between telecommunications and personalized advertising," said Jonathan Mayer, a computer researcher at Stanford University. "The FCC might have something to say about that."

Mayer argued that telecom companies like Verizon are "in a privileged and trusted position" because they have such sweeping access to sensitive information flowing over their networks, and it's often difficult for consumers to switch to competitors. 

Jeff Chester, the executive director of the Center for Digital Democracy, warned that there are "disturbing privacy issues here as Verizon integrates its massive customer database into AOL's cutting-edge digital data-targeting system."

Verizon already ran into a privacy controversy last year by using a kind of tracking code that was impossible to delete. After facing criticism from privacy advocates and lawmakers, including Sen. Bill Nelson, a Florida Democrat, Verizon said it would allow users to opt out of the so-called "supercookies."

Verizon declined to comment Tuesday on the criticism from privacy advocates.

In announcing the deal, Verizon CEO Lowell McAdam said he wants to provide video and advertising across platforms like televisions, computer screens, and smartphones. "AOL's advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams," he said.

Meanwhile, Verizon doesn't seem to have much interest in AOL's websites. Tech-news siteRe/Code reported Tuesday that Verizon is looking to sell off The Huffington Post.

Verizon may be hesitant to get back into the news business after it became embroiled in a controversy last year when it tried to start a tech-news site called "SugarString." The company faced charges of censorship because at least one employee reportedly said controversial topics like net-neutrality and government surveillance were off-limits for the news site. Verizon shut down SugarString not long after it launched.

The AOL deal will still have to win approval from either the Federal Trade Commission or the Justice Department. The Justice Department has traditionally handled major telecom mergers, including Comcast's failed bid for Time Warner Cable, but the FTC often focuses on deals involving online companies. The review will focus on competition, not privacy issues.

The FCC will not investigate the deal because it won't involve the transfer of any FCC licenses, the agency confirmed.