AOL (NYSE:AOL) competes with Yahoo (NASDAQ:YHOO) and Google (NASDQ:GOOG) in the display advertising market. The company’s $37 million acquisition of StudioNow, an internet platform to create and distribute video and website content, in January 2010 will increase AOL’s video content which will help the company to make more money through display advertising.
Display Advertising Business Constitutes Nearly 60% of AOL’s Stock
Display ads are shown against web content, email and instant messaging services in a variety of formats like static, animated, and multimedia ads. We estimate that the display advertising market constitutes nearly 60% of the $28 Trefis price estimate for AOL’s stock.
StudioNow Could Bring in More Visitors to AOL and its Third Party Sites
StudioNow makes money by syndicating and selling video and website content to medium and large sized companies as well as local businesses that publish them online. This content is created by freelancers, video artists, and animators who can upload and edit videos on Studionow.com.
AOL will leverage StudioNow for its content management system seed.com, which is a site where AOL posts topics that it wants freelancers to cover with articles, photos and videos. AOL then publishes the content created on its web properties.
The StudioNow acquisition will make it easier for freelancers using AOL’s seed.com to create video content for AOL. As result, AOL will be able to place more video content on its web properties which it can leverage to attract more visitors to its sites and make money through display ads.
Total Unique Visitors to AOL and Third Party Sites to Increase to 230 million
We estimate the total unique visitors for AOL websites will increase to 130 million and unique visitor traffic for AOL’s third party network to rise to around 100 million by the end of the Trefis forecast period.
You can modify our forecasts below to see how AOL’s stock would be impacted if its unique visitors were to grow faster than we forecast.
AOL’s Revenue Per Page View Rates to Decline
Online video advertising forms a very small portion of the overall online advertising market, but this expected to change. An eMarketer report estimates that online video ad spending in the US will increase from $734 million in 2008 to $5.2 billion by 2014.
Ad rates for online videos are often higher than ad rates for static web page content. We estimate that AOL’s ad revenue per page view is about $3 per 1,000 page views. In comparison, ad pricing for video content can be as high as $20 per 1,000 views.
Revenue per page view (RPM) for AOL has declined in recent years as a result of the broader downturn in the advertising market and we expect declines to continue in the near-term followed by a moderate recovery in rates over our forecast period.
However, a rising mix of high priced video ads could help AOL’s ad rates recover faster than we forecast. You can modify our forecast above to see how AOL’s stock would be impacted if RPM rates were to improve more than we forecast as a result of video content from AOL’s StudioNow acquisition.