A version of this article appeared in the Autumn 2018 issue of strategy+business.
Tim Armstrong works in an open-plan office that sits at an extremely busy and often cacophonous intersection near Union Square in Manhattan. As the CEO of Oath, the unit of telecommunications giant Verizon that houses AOL, Yahoo, and the Huffington Post, among other brands, Armstrong is a key player in — and theoretician of — the convergence of content, mobile communications, and advertising.
At age 47, Armstrong has played a key role in assembling many of the online world’s largest and most significant platforms. He ran the U.S. advertising business at Google when it acquired YouTube in 2006. After joining AOL as CEO in 2009, he acquired the Huffington Post and ultimately sold AOL to Verizon in 2015. Last year, he engineered Verizon’s US$4.5 billion purchase of Yahoo, uniting two giants of the early Internet under a single banner: Oath.
Armstrong is now leading the powerhouses formed in the era of dial-up Internet and flip phones into the futuristic world of 5G, voice-assisted commerce, algorithm-generated advertising, and NFL games streaming on phones.
In the spring, Armstrong sat down with strategy+business to discuss the rapid evolution of the media and telecommunications industries and the dawning of a mobile consumer economy.
S+B: There’s a new round of convergence that’s been happening. And you’re obviously at the center of that. Why are telecommunications companies investing more in content and media assets? In the past, that has not necessarily turned out well.
ARMSTRONG: If you go 10 or 20 years back, the consumer had clear swim lanes. If I was reading a newspaper, I was reading a newspaper. If I was watching television, I was watching television. Mobile’s been the single largest driver of consolidation, I’m going to guess, in human history. I don’t want to be too hyperbolic, but it is the first time consumers have one device and one connection to almost 100 percent of their intake. So the entire swimming pool of telco, content, movie theaters, and newspapers can be put on one connection, one device, one human interface. And by the way, people like it. So I think that’s the driver. Looking through the lens of the consumer, we could be in a world where we end up with singular large interfaces controlling the entire experience.
S+B: So, given that, what’s the strategy for Oath, and what does success look like over the next two to three years in that context?
ARMSTRONG: We are building Oath for the mobile consumer economy, and our success comes down to two really basic concepts. One, that we will be able to provide you with must-have mobile services as a consumer. And two, that we’ll provide other businesses or other partners access to those consumers on mobile.
S+B: A lot of your monetization is through digital advertising, which, if you read the commentary, is hypercompetitive. Facebook and Google are absorbing all the spending, and Amazon’s on the horizon. What’s the white space for Oath in a landscape like that?
ARMSTRONG: I think the white space is enormous. The entire world has tilted its head toward Google, Facebook, and Amazon. Those three companies have models that have been built up over the last 20 years now and are very deeply entrenched. But I also see an $800 billion to $1 trillion industry that is still hooked on the linear interactions in that swimming pool with different lanes. If you look at the total amount of head count, dollars, and interactions, mobile accounts for just a fraction of that. So is it likely we’re going to end up in a world 10 years from now where there are two dominant players and one or two emerging players in a trillion-dollar industry overall? I’d say the chances of that are pretty low. And also, I believe that the current state of advertising is really poor. You watch television, and you see multiple ads from the same company over and over again. That’s broken. Print magazines are very thin. Digital advertising I would describe as broken. On our side, that’s a huge opportunity.
S+B: Do you think we’re at a moment, too, where ad buyers are prepared to behave differently? And will they actually shift money to those properties that are more premium, more transparent, and more verifiable?
ARMSTRONG: I think there are a lot of pots and pans being banged about it and very clear messaging about what they want in general. But I would say they haven’t put their lumber where their messaging is. And I think that’s something they need to do. And by the way, the reason they haven’t is that they’re trying to stay with the consumer.
S+B: What do you tell your sales team in terms of your expectations about organic top-line growth? Or do you tell them to worry more about experience, effectiveness, and metrics?
ARMSTRONG: As we build Oath together, the first thing we’re doing is taking out the off-market strategy. That is, in certain parts of the company, there was a mentality that content is commoditized, and ads are commoditized, so we should just dump everything into a giant stream and let all the machines sort it out. The reality is when you look at what the marketers want, what the consumers want, that’s not it. So we are refocusing the company around two simple propositions. One, what does the consumer want and need? And two, what are the core needs of a marketer or advertiser? Those questions lead you down a couple of different paths. On the consumer side, some consumers value information without ads more than they value information with ads. So, that means you probably end up in some paid models. On the advertising side, really crappy and repetitive ads that are retargeted don’t do anybody any good. We can’t afford to have the advertisers have bad results because we’re sending crappy and/or non-quality ads to the consumers.
S+B: As you look out on the horizon, how do things like 5G and voice interfaces act as game changers for Oath and Verizon?
ARMSTRONG: The core premise of putting Oath and Verizon together is that we have now built one of the largest mobile consumer membership companies on the planet. We have AOL, Yahoo, 20 other brands, and Verizon — and it fits together cleanly. If you believe the mobile consumer is an empowered consumer who will digest commerce, community, and content at scale, it’s really easy to see how our news, sports, finance, entertainment, and advertising systems would benefit a Verizon consumer — and, by the way, other carriers overall. Also, the premise of what we’re putting together is not just built on today’s mobile consumer. It’s built on a 5G consumer. So, if I said to you, “Five years in the future, your connection speed’s going to be 100 times what it is today; your phone’s going to be 100 times more powerful; the screens in your house are going to be more powerful; you’re going to have voice, text, video interfaces; it’s going to be more of a magical consumerism world around mobile and 5G,” we’d argue on our side that’s an exciting future.
S+B: And what’s the specific reason it’s better to be tied up directly with Verizon as opposed to just working with them as a partner?
ARMSTRONG: One is that understanding a mobile consumer’s needs from the inside out rather than the outside in is very strategic. If we want to understand how 5G versus 4G affects the consumer, or how much data people consume and when they consume it — we could be an outside partner to Verizon and understand some of that. But being inside the company, it’s essentially forced us at Oath — and this is the reason we did the deal with Verizon — to put a mobile lens on everything we do. Verizon benefits because it gets a business model that’s not just wireless subscribers. At Oath, we have a business model that runs across all carriers, all countries. So, for Verizon, it’s a way to take its power, data, and information, and supercharge a services company that rides above Verizon from a network perspective to other consumers and other places.
S+B: You’ve also been able to invest more in content since you’ve been part of Verizon. Can you talk about the investments, particularly in sports, that you’ve made with the NFL and with the NBA, and how that comes together both for Oath and also for Oath plus Verizon?
ARMSTRONG: When we were doing the original Verizon deal with AOL [in 2015], we used to carry around at the AOL board meetings a list of five things that you had to have to be successful in the future. One was mobile, two was video, three was data, four was distribution, and five was talent. They had the same needs on the opposite side. Sports are some of the most engaging, high-quality, multiscreen pieces of content that we could do. The deal we just signed with the NFL [a five-year, $2 billion deal to stream games] is predicated on mobile. And then we did a deal with the NBA [which lets fans buy access to NBA games], and we had a bunch of other deals in soccer. Our premise is picking off a human vertical. If you went back to the beginnings of the Olympic Games, humans have always been sports fans. If we’re able to take the historical interest in being a sports fan and connect it with mobile, we are superserving a segment of the customers. Verizon’s a big enough company that it can actually make the investments. AOL or Oath on its own wouldn’t have the horsepower to compete for an NFL mobile deal.
S+B: One trend we’re seeing, in the New York Times or Netflix, is finally telling consumers they’re going to have to pay for content. And that is antithetical to the way the Web, including Yahoo, developed. Does being owned by Verizon take some of the pressure off the need to charge for content and services?
ARMSTRONG: This may be old school, but we try to run the company from a profit standpoint. We’re not religious about free content or paid content. We’re religious about the consumer. So, if there are cases where we should have more paid relationships because a consumer wants that, my guess is you’ll see us have more paid relationships with consumers in the future. We tested it at AOL. Outside of dial-up, we sold hundreds of thousands if not millions of subscriptions outside, so we’re actively pursuing that at the combined Oath now. The other thing is, when you look at the future landscape of the world, having an inch-deep, mile-wide relationship with consumers is probably not a business model that’s going to stand the test of time. If you assume the swim lanes in the pool go away, you have to have a much deeper relationship with your users.
S+B: Most media businesses have one dominant revenue stream, maybe two. But now it seems like you may have four, five, six, or seven different revenue models in play around a given brand or an experience. How do you manage around that?
ARMSTRONG: The way I think about it is there’s a consumer ecosystem. One piece is content, one piece is commerce, one piece is establishing community, and one piece is service. We have two sides of our business. We have a front-end consumer business and a B2B business. As you get better at understanding the many ways to deal with consumers and monetize them, it creates a big B2B opportunity too. The mobile landscape is forcing us to develop the engineering prowess to be able to understand how to monetize the evolving consumer relationships over time. Half of our revenue, basically, is partner revenue, overall. It’s not dissimilar to how Amazon manages AWS [Amazon Web Services] or Google puts search out on other partners’ sites. The B2B side of the business over time becomes as important as B2C and vice versa. If you go out 10 years, I think the largest companies will have a robust B2C business but also have a robust B2B business. Alibaba’s almost the opposite. It started from a B2B marketplace and then went to the consumer.
S+B: On the topic of streams, there are many paths that a company can take to develop new revenues. How do you think about that strategically?
ARMSTRONG: This is a struggle. I call it the space problem. A lot of companies go after spaces. Video is hot. Commerce is hot. Amazon affiliates are hot. And if you get into the space disease, you could probably occupy the next three years of your life space-hopping. But when we start looking at this through a consumer lens, we have a different viewpoint. We’d ask, What is the actual consumer value proposition and need? And we have to ask whether selling affiliate spatulas on Amazon is meeting a huge consumer need.
S+B: Looking at the market, we’re now seeing a fragmentation away from the smartphone, whether it’s Alexa or your watch. What complexity and opportunities does this fragmentation create for your business?
ARMSTRONG: On one side, it’s fragmenting, and on another side, it’s consolidating. So, while you might have voice and video and all the different interfaces, underneath you have people competing to be singular servers. So, if you’re on Alexa, you may be shopping on a desktop. You may be watching Prime on your phone. You may be having a voice interface on Alexa, but you may have a single account underneath it. People are going to get smarter about the interfaces that content and services go on. The problem for our business is you have to think about the singularity effect underneath it. Let’s say five years from now you might use four or five different types of interfaces. The question is, Do we bet on the interfaces? I could run around the building right now saying everyone do voice, do voice, do voice, do voice. But if we don’t understand the software layer underneath — how all those things are horizontally getting connected — we could end up getting boxed out of an entire space.
The first 5 percent of strategy matters the most, because if you get off in the first 5 percent, you’re going to end up someplace you don't want to be during the next 95 percent of the journey.
We have a strategy built for where we think that’s going in the next five or 10 years. Having been in the industry for 20 years, I find it incredibly hard to think about the fact that there are going to be twice as many connected consumers in coming years. They’re going to be twice as empowered with speed, twice as empowered with the power of the devices they’re using. The studies we’ve done internally show that there are 400 million people that use video content and spend more time on their phone than they do on traditional TV. The average power user now has 31 hours of screen time a day, meaning they multitask. Jump 10 years in the future, where there are several billion people who have had smartphones for 10 years. It’s a huge opportunity.
S+B: How do you prioritize the global growth opportunity?
ARMSTRONG: The U.S. is a big market. It’s the number one global economy. It’s got 4 percent of the world’s population. There’s a rich opportunity for us still in the U.S., but it’s undeniable that if you’re not globalized to some degree, you’ll miss opportunity. Both AOL and Yahoo were much bigger global players a few years ago. They retrenched into the U.S., and they did joint ventures. And there’s a landscape of unsuccessful international deals. In this country it’s hard to have a global perspective, because there are a whole bunch of international companies that aren’t battling in the U.S.
Now we’re going back out. If you go to Indonesia or Singapore, for example, these are the first places in the world where the Chinese, U.S., and Western European companies are all competing. You have to go to those regions to see what the international competition is going to be like and what the world is going to look like in 2030.
S+B: We’ve seen the whole value chain get reconfigured in the media, particularly around the role of the large ad agencies. Where do all these changes leave the agency?
ARMSTRONG: Historically, ad agencies have provided some key services. One was creative services, which allow clients to have an outside viewpoint on your products. The second is that they were able to defragment the industry landscape. So, if I wanted to run ads on massive numbers of newspapers or television or radio stations, the media plan services were helpful. And the third piece was buying — the agencies would get you a huge discount for volume. I think three major things have happened. On the media planning side, software is able to defragment your buying choices at a much faster, higher degree, and in the future, machine learning will allow you to plan media at a nonhuman scale. So the agencies have to look at machine learning. On the buying side, the challenge is this: In the past, if I was a big client, I had massive leverage over the media companies to force them to do what I wanted on measurement, customer research, or custom creative. Now, with these ecosystems in which there may be 4 million advertisers, the large advertisers and agencies acting on their behalf still have power, but it’s not the same power. If you played in a soccer league of 200 teams, you’d play a lot differently than if there were 4 million teams in that league. The creative side, I think, is one of the greatest opportunities for agencies. If you were building today’s creative agency, I think you’d probably be doing 100 times the amount of creative you were doing previously. It may have one theme or one concept. Distribution’s changed so much that creative needs to change.
S+B: You have done a lot of acquisitions — YouTube when you were at Google was probably the most historic. You’ve sold your company to Verizon, too. What have you learned about what it takes for acquisitions to be successful, particularly when they involve people and technology?
ARMSTRONG: If you have a solid core thesis about what the M&A is going to do for the core relationship with a consumer or advertiser, your chances of success are much, much higher than if you’re doing things that are motivated by financial engineering or done just to get into a space. And it’s much harder to keep the teams together when you don’t have a core thesis. We use this term all the time internally: The first 5 percent of strategy matters the most, because if you get off in the first 5 percent, you’re going to end up someplace you don’t want to be during the next 95 percent of the journey.
And the other piece is people. Every company I’ve been to has a beautiful-looking strategy deck, and most of the time it makes a ton of sense. Here’s the problem with this: people. In many cases, if you change your strategy, you may have to change your people. But I don’t know many companies that do that. If Verizon woke up one day and said we want to be a consumer packaged goods (CPG) company, I would hope the first thing it would do is fire me. I have no idea what’s going on in the CPG landscape. I would say, in some cases, the companies we’ve bought, we’ve had their people run things. We have a bunch of the senior Yahoo people running a huge piece of the Oath business and strategy, and that’s because some of the Yahoo people were better at some of the things than the Oath people. My experience is, again, people spend 90 percent of the time on strategy and 10 percent of the time on the people. My guess is if you reversed it, you might have a better outcome.
S+B: Another people question. A lot of tech and media gets criticized for being too male, and too homogeneous, particularly at the leadership level. You’ve had a pretty strong focus on diversity. How has it benefited you as a leader and CEO?
ARMSTRONG: I’m the chairman of the Internet Advertising Bureau (IAB) Diversity in Leadership Council. If I’m being really direct about it, I’d say: Just like everybody has a strategy presentation, everybody has a diversity presentation. And one of the things I’ve done here is say that we’re going to treat diversity like a business model. My colleagues brought me a diversity memo to sign in September from a giant study, and we were getting the IAB award, and they said, Can you sign this? You’re going to be the co-presenter of it. And I said nope. Not unless 50-plus percent of the VPs we’re going to hire in the next three or four months are women. Seven out of the nine vice presidents we hired at the company in the following six months were women. That’s a sea change from where we were a year ago.
When I go to the Makers women’s events, I’d say 60 percent of the time I’m the only guy there. We had a Makers dinner at Diane von Furstenberg’s apartment in New York. While I was going up in the elevator, I realized I might be the only male walking into this dinner. And I was. So, during dinner they went around the tables and asked how people could move women’s diversity forward. I had strong viewpoints I wanted to share. But I gave 50 percent of them in general, because I had no idea what the reaction was going to be in the room. Then I started thinking of our internal meetings and looking at how many meetings had one woman, or one minority. And I thought to myself, If I gave 50 percent of my viewpoint in that meeting, does that mean every room I go into where there’s one person of one type of background, they are only giving 50 percent? And I’m thinking, Would you pay me fully if I showed up to every meeting and only gave 50 percent? And on top of that, half of our consumer population is women. So you can imagine the product and engineering meetings you go to where it’s 100 percent male. One of the things I’m trying out next week is I’m going to be canceling meetings I walk into that don’t pull insights and perspectives from diverse backgrounds.
S+B: In the portfolio of activities you have going on right now, what are you most excited about in terms of growth, in terms of products, services, brands?
ARMSTRONG: It is in our DNA to understand what consumers want in their lives over a long period of time. A lot of people from the outside might look at this as a negative, saying that we have these big, historic, giant brands. If I look at all the startups in the world, most of them don’t know what we know about consumers. I’m excited that we have access to a billion consumers and that we have companies that have been around for 20 years that have made it through all the trials and tribulations in the industry and are backed by one of the world’s best mobile companies. We have scale, and we know a huge amount about consumers and know how to take care of them. And if we improve that slightly, we’re going to have a big thing.
- Christopher Vollmer is the technology, media, and telecommunications (TMT) Americas leader for PwC and the global TMT leader for Strategy&, PwC’s strategy consulting business. He focuses on growth strategy, capability building, and business transformation for leading media and technology companies. Based in New York, he is a principal with PwC US.
- Daniel Gross is executive editor of strategy+business.