Aug. 1, 2016 8:56 p.m. ET
Hollywood producer Craig Piligian pitched a reality show to major television networks last year, and every one passed. Then, after an October meeting, the nation’s largest cellphone carrier snapped it up.
“They stepped up big time. It was broadcast-network money,” Mr. Piligian said of the deal with Verizon Communications Inc. Verizon agreed to finance more than 100 short episodes of “The Runner,” about contestants who try to cross America without being caught by other players, including viewers.
The show, which plays online and on Verizon’s smartphone video app, is part of a more than $10 billion gamble by Verizon to build a digital-media business to compete with Facebook and Google for advertising dollars.
Verizon gained some ad technology and websites last year by buying AOL Inc. It doubled down in July by agreeing to pay $4.8 billion for Yahoo Inc.
It is a radical move for a corporate giant long treated by investors as a utility with a safe dividend, and is a strategy that has previously stymied other players, including Yahoo itself. Even if it succeeds, it may have little impact “on the battleship that is Verizon,” said Craig Moffett, an analyst at MoffettNathanson.
Verizon cemented its wireless dominance three years ago by acquiring Vodafone Group PLC’s 45% interest in Verizon Wireless. Revenue growth and profits, however, have plateaued in the wireless industry. Last quarter, Verizon’s revenue fell 5%, its first quarterly decline in six years, even though data usage on Verizon smartphones surged 44%. Competition is too intense.
“Any time a business stands still like this and tries to just live on what you’ve done, you’re beginning the death spiral,” Verizon Chief Executive Lowell McAdam said in an interview.
For Verizon, part of the answer is Hollywood and Silicon Valley. The plan is to own and distribute online content and use data collected from mobile phones to target advertising to tens of millions of users.
Talking to analysts earlier this year, Verizon’s new-business chief Marni Walden described the company’s ambition by flashing a slide labeled “create ‘ Viacom’ of tomorrow”—referring to a media conglomerate with $13 billion in revenue.
Verizon isn’t alone among telecom carriers in trying to figure out a different form for the future. AT&T Inc. also had sought Yahoo, and last year AT&T spent $49 billion to acquire DirecTV and become the largest U.S. provider of pay television.
Mr. McAdam said the core of Verizon’s business will always be its wireless network and he isn’t expecting quick returns from the media investments, which are about 5% of capital spending. “It’s not a bet-the-company kind of play,” he said.
The executive has a history of making unorthodox moves. When he ran Verizon’s wireless unit, he joined with Google to develop what became the Android operating system for smartphones. That paid off, helping counter AT&T’s then-exclusive deal for the iPhone.
Success in Hollywood may prove tougher. Producers are enjoying a seller’s market. Broadcast networks, cable channels and tech firms such as Amazon.com Inc. and Netflix Inc. all are paying big money in search of the next hit.
Yahoo several years ago spent heavily producing content such as the show “Community” and hired Katie Couric for an online news program. Yahoo eventually scrapped most of this, then in January shut the website for viewing its shows. “We couldn’t see a way to make money,” Yahoo’s chief financial officer, Ken Goldman, said last fall.
Verizon’s mobile video app, called go90, is off to a slow start. Launched last fall, it has several million monthly active users but ranks 55th in the iPhone app store’s entertainment category, according to tracking company App Annie.
Go90 grew out of a company called OnCue, first envisioned as a console plugged into a TV set to let users stream national and local TV content over the internet. Verizon was able to buy it cheap in 2014, but at first wasn’t sure what to do with it.
Verizon set up focus groups of people who let Verizon executives record them in their living rooms while interacting with content on their TVs, computers and smartphones. The executives found that young people didn’t just sit around a TV screen but shared short video clips on their computers and phones. Verizon decided to turn the OnCue service into a mobile video app, which became go90.
It needed technology to target advertising to go90 users. At a 2014 conference in Sun Valley, Idaho, Mr. McAdam met Tim Armstrong,who was building up AOL’s ad-technology business, and they talked about ways to work together.
“In the beginning it was more using his ad-tech capability,” Mr. McAdam said. “A commercial discussion with him went quickly to an M&A discussion.”
AOL became the repository for Verizon’s digital-media efforts. “Which then leads you to Yahoo, which just helps you scale AOL,” Mr. McAdam said.
In March, Verizon and Hearst Corp. linked up to develop programming for go90, with a site called RatedRed.com aimed at young people in the heartland, and Seriously.TV, a comedy network focused on politics.
A month later, Verizon bought a stake in AwesomenessTV, which produces short shows featuring YouTube stars, and joined with Hearst to acquire Complex Media, a music and pop-culture website and print magazine targeted toward 18- to 24-year-old men. Complex will help drive its followers to Verizon’s go90 app, which also has some live games from the National Football League and the National Basketball Association.
Gabriel Conte, a 21-year-old YouTube star, had never used Verizon’s app when the company hired him for a lead role in “Mr. Student Body President,” a scripted show coming to go90 in the fall. On his YouTube channel, Mr. Conte posts comedic musings with his friends and siblings about teenage life.
“We’re just telling our fans to watch our shows,” he said. “What go90 has done is taking these people and crossing them over.”
Drawing on the popularity of YouTube stars is central to the strategy. One of go90’s few successes so far was a show about high school called “Guidance.” The lead actress was Amanda Steele, who gained millions of followers on YouTube posting cosmetic tips.
For Verizon, all this means stepping outside its comfort zone. Its content-acquisition efforts are led by Brian Angiolet, a veteran of Verizon’s Fios TV service and of ad buying. He said his experience in the two areas gives his team the ability to navigate the media world.
A year ago they went to Hollywood to see talent agencies, in meetings brokered by Mark Dowley, a former partner at William Morris Endeavor Entertainment who serves as a media adviser to Verizon. He said the company told the agencies it sought original programming that is digital-friendly and interactive, but not necessarily short-form or low-budget.
Communications between data-driven telecom executives and creatively driven entertainment people can be like strangers speaking different languages. “They’re different cultures that need to coalesce,” Mr. Dowley said. “The Hollywood guys have to get used to dealing with telecom companies that are very metrics-driven.”
Some ad executives have been critical of Verizon’s approach and early advertisements. “This feels like something a big corporation would push out in order to seem cool to young people, rather than an actually cool startup or product,” said Tim Leake, senior vice president, creative marketing and innovation, at ad agency RPA.
Several noted that Verizon was encouraging potential go90 users to rotate their phones 90 degrees and hold them horizontally to watch videos—just as Snapchat was exploding and urging people to watch video vertically on their mobile devices.
Ad buyers said go90’s ad prices have been too high. According to several, the company was seeking $10 million minimum commitments for individual marketers last year and $50 million deals for large ad-agency holding companies.
Publicis Groupe SA signed up for an ad buy on go90 last fall that included multiple advertisers. The deal has been a disappointment for Publicis as go90 hasn’t delivered the audience it promised, said people familiar with the matter.
Verizon declined to provide specifics of agency contracts, though a spokeswoman said the deals included more online content than just go90.
The company’s Mr. Angiolet said go90 is working through some of the app’s “hiccups,” and performance and viewership have improved since a July overhaul.
“The Runner,” which is also produced by Ben Affleck and Matt Damon and premiered last month, was meant to be Verizon’s first hit with broad audience appeal.
It was developed at ABC network in 2000, but the logistics of managing a nationwide chase prevented it from reaching the air, particularly after the Sept. 11 terrorist attacks. Yahoo even tried to make “The Runner” in 2006, during an earlier stab at original content. Yahoo bought rights to the project but canned the idea when its strategy changed.
Last year, Mr. Piligian, whose Pilgrim Studios is owned by Lions Gate Entertainment Corp., and other producers figured they could revive the idea by using mobile technology to enable the chase and get viewers involved.
After networks passed, they brought up the idea casually during a meeting with Verizon’s Mr. Dowley in New York and were astonished when he wanted to acquire it.
“The Runner” has more than a million viewers. While the numbers are far lower than the millions who watch even a modestly successful TV show, executives at Verizon say they are pleased with the results.