Verizon and Facebook agree: Content is king again

Ever since the dawn of the mass-market web in 1995 or so, the saying "content is king" has moved in and out of fashion.

With Verizon's $4 billion purchase of AOL, and Facebook's new Instant Articles initiative, which embeds content from other media sources directly into Facebook, it looks like it's back in vogue.

Here's the thinking.

There are only a few things that people want to really do online. Buy and sell. Communicate. Play. And look at content - news articles, TV shows, games, cat videos, porn, and so on.

Over the years, tech companies went through periods of urgency where they all seemed to realize that the technology they were building wouldn't amount to much if they didn't have something that people wanted to do with it. So they'd hire, buy, or partner with people who create content.

The peak of "content is king" came when AOL bought Time-Warner for $146 billion in stock at peak-dot-com prices in 2000.

Now, mobile devices have replaced the PC -based web browser as the number-one place where people consume content online, and tech companies are making sure they are poised to profit from that habit.

Verizon and the fear of a dumb pipe

At the dawn of the smartphone era, Verizon (and other telcos) thought they were going to be able to add all sorts of new revenue streams - you'd download music, video, and games directly from their stores. But Apple's iTunes and later Google Play put an end to that dream, and most paid and subscription content now comes through these platform providers or third party apps like Netflix and Hulu. Not the carriers. Texting, meanwhile, has diminished in importance thanks to social networking and chat apps like WhatsApp.

So once again Verizon is forced to confront its worst fear: becoming a "dumb pipe" that is only there to carry an ever-increasing amount of data at ever-faster speeds.

That's a bad business because customers expect prices to go down and service to get better over time - it happens with every other tech product! The only way to win is to cut expenses faster than prices.

So, it bought a content business.

Or at least a way to make money from content. There's some debate about whether Verizon is really interested in the content properties like the Huffington Post and TechCrunch - one report suggested the company may spin them off - or if Verizon is mainly interested in the advertising platforms that AOL has built to make money from those properties.

But either way, Verizon is clearly interested in profiting from the consumption of content on mobile devices.

Specifically mobile video. As a recent McKinsey presentation showed, video consumption is growing faster on mobile devices than on any other medium. Verizon owns the pipes today; with AOL it can also own, or at least profit from, more of the stuff traveling over those pipes.

Facebook's mobile ad mastery

Facebook is an interesting case study in "content is king." The Internet company looks a lot like a media business, making nearly all its money from advertising, yet it doesn't actually own or produce any content. All the content is produced or shared by the nearly 1.5 billion people now using the service.

This has been a pretty good strategy. Facebook booked $11.5 billion in ad revenue last year, with a growth rate of 65%. It's been able to do this by showing fewer ads (down 40% in 2014) and charging a lot more for those ads (up 173% in 2014). This is what you can do when people spend more and more time on your site - average time spent tripled from 6 minutes to 21 minutes between 2010 and 2014, according to Statista.

More important, Facebook's mobile ad business has grown from zero at the time it went public in May 2012 to make up 65% of its total ad revenue last year - about $7.5 billion. Basically, all of Facebook's growth is coming from mobile.

But one thing people love to do on Facebook is share content. If people leave Facebook to view that content, and then view or click on an ad on a media company's website, Facebook makes no money from that transaction (unless the media company is showing the article in an app that happens uses Facebook's year-old mobile app ad network, the Audience Network). And who knows when that person will come back to Facebook?

So with Instant Articles, media companies publish their content directly within the Facebook app on mobile phones, where Facebook at least has a chance of selling an ad against it and earning 30% of the revenue from that ad.

(Often left unsaid in this equation is the fact that more great content on Facebook keeps people on Facebook longer, where they're more likely to stay and see ads that Facebook sells and earns 100% of the revenue from.)

The bait for this hook? Facebook says that outbound links to news articles can take up to eight seconds to load - notice how that "eight seconds" figure appears in every story about the new feature? - which creates a subpar experience for readers.

It's true: Instant Articles are beautiful and load fast. Over time, perhaps, users will prefer those articles over the old-fashioned link-off-to-another-site kind of article, and will share them more, giving publishers a bigger pie of advertising dollars to take their cut from.

Meanwhile, Facebook inserts itself more directly into the mobile value chain.

So what happens next?

History doesn't repeat itself, but sometimes there are echoes.

The last tech boom turned out to be a bubble as valuations outstripped reality.

The AOL-Time Warner deal ended in tears in 2003, when the combined company took a huge writeoff on the value of AOL's online business, leading to a $99 billion loss in 2003 - the largest annual loss ever.

Other tech companies who had made big content bets also started to unwind those bets - for instance, Microsoft sold its online magazine Slate, shuttered plans to make original video programs for MSN and eventually dissolved most aspects of its MSNBC partnership with NBC.

For a few years, tech companies went back to being tech companies, and media companies went back to being media companies.

But the underlying shift that drove those dot-com investments in the first place - the movement offline to online - turned out to be real, and a lot of new companies came to profit from it. Google and Facebook are the biggest, with combined market caps of about $600 billion, but there are many other tech companies that survived the dot-com crash or emerged from its ashes and remain strong and thriving today.

The current tech boom has been driven by the shift from PC to mobile devices. It may get into the same kind of bubble territory or not, but eventually that boom will end.

Look for the tech industry's infatuation with content to end then, too.