In its efforts to improve profitability, AOL (NYSE:AOL) has announced that it is selling three of its shuttered music assets to Townsquare Media group. AOL has been selectively selling its non-profitable products so that it can focus on its core content verticals and offer new products for these profitable services. We think that selling its music assets is a step in the right direction as the industry is highly competitive with a number of players and AOL has not been able to monetize its music platform. Moreover, AOL can now plough back the money from the sale into developing content for its platforms, particularly its local news social offering, Patch.
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Exit From Online Music
In its Q1 CY13 earnings announcement, AOL had stated that it was winding down its music business as it looks to cut costs in non profitable divisions and reinvest money in developing content for its profitable core business. AOL music ranks 6th in the music website industry with over 10 million unique visitor count.  AOL music did not achieve the same level of user engagement as some of the competitors such as Pandora and Spotify, but consistently lost market share in the music industry.
However, AOL has announced that it has reached a definitive agreement with Townsquare Media group to sell three of its shuttered music properties that include The Boot, The BoomBox and NoiseCreep for an undisclosed amount. We believe that this will augur well for AOL as it can now use the money from the sale to develop content for its display ads business.
Why AOL Needs To Invest In Content
According to our estimates, AOL currently derives 27% of its value from display advertising, revenues for which are primarily dependent on the number of pageviews across its platforms. A strong content offering which promotes user engagement, can drive page views across AOL sites and drive revenue growth at AOL.
We believe that AOL must invest in its social offering Patch to increase user engagement so that it can challenge competing websites such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO). AOL has maintained that Patch will be a profitable venture for the company. Although the unique user count at the recently re-designed Patch did increase to over 13 million unique users, but AOL has yet to monetize this platform. Going ahead, if AOL can increase Patch’s market reach by offering more local content across more geographies, it can further increase its unique visitor count and pageviews.
We currently have a $27 price estimate for AOL, which is approximately 25% below the current market price.Notes: