AOL (NASDAQ:AOL) acquired adapt.tv for $405 million last year. Since the acquisition, it has catapulted AOL to #1 position in terms of the number of ads served in US. The online video industry is growing at a rapid pace due to its increasing popularity among users and digital advertisers alike. However, the ad technology surrounding this industry has been slow to take off. Currently, Adapt.tv leads the video ad tech industry, and continues to dominate over some of the worthy ad tech contenders such as Google and Facebook. In this article, we will analyze the trend supporting online video ads industry and the ad exchange platforms. Furthermore, we also explore the revenue opportunity for AOL.
Trends In Video Ad Spending And Ad Tech
Online video ads industry is growing at a robust pace with strong support from the content and the advertising providers. The change in consumer behavior is prompting the migration of TV ad budgets to online spending. While TV ad spending is expected to exceed $75 billion by 2017, video online ad spending is expected to exceed $9 billion by 2017, according to eMarketer.  Additionally, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices. According to eMarketer,the share of mobile ads in online video ad spending is expected to increase from 12.6% in 2012 to over 29% by 2017.
eMarketer expects digital video spending to reach around one-eighth of what is spent on television ads by 2017. According to Interactive Advertising Bureau, 70% of video ads buyers said that they would likely move TV dollars to digital video in the coming year.  These advertisers believe that shifting the TV ad budget to digital increases the reach and effectiveness of their ad campaigns. 
Over the past few years content providers have been increasingly adopting ad-exchange mechanisms that use real-time bidding (RTB) platforms. An RTB or programmatic platform is a method of selling and buying online display ads in real time. RTB aggregates the impression slots offered across multiple ad networks and matches them (based on the advertisers target, budget and placement requirements) with the most appropriate ads. Additionally, an RTB employs dynamic pricing auction method which allows the publisher to supply his impression to the highest bidder at any given instant. This results in advantages such as better cost efficiency, higher performance and greater granularity with targeting and measuring an ad’s effectiveness. According to eMarketer, advertisers spent $2 billion on RTB in 2012 and will increase to $3.34 billion in 2013. eMarketer also expects that real-time bidding will account for more than 29% of all digital display spending by 2017. 
Adapt.Tv To Fillip AOL’s Revenues
According to our estimates, Display Ads on third party sites is AOL’s largest division and makes up 31% of its value. AOL is aggressively developing its RTB platform. We believe that RTB will be a key growth driver for AOL as it efficiently matching impressions with relevant display ads that in turn boosts revenues.
Adapt.tv provides complete programmatic video technology stack across all screens, with different form factors, available in the market place. Before the acquisition of Adapt.tv, AOL did not feature in the top 10 video ad properties by video ads viewed list. However, post the acquisition it continues to not only feature in the 10 list but also maintain its #1 ranking. According to comScore, AOL sold nearly 4.3 billion ad impressions in the U.S in December 2013. ((comScore Releases December 2013 U.S. Online Video Rankings, January 10 2014, www.comscore.com)) By comparing pre acquisition and post acquisition ad impression numbers, we estimate that Adapt.tv constitutes over 50% ad impressions sold in December.
If RTB captures 29% of the $9 billion video ad spending, the total addressable market for Adapt.tv is approximately $2.7 billion. Currently, Adapt.tv leads the U.S video ads industry, and has a 12% market share in it. It has lost some of its market share to LiveRail, which is expected to hit $100 million in revenue rate in 2013. At present, we project revenues from third party sites to be at $700 million by 2020. However, if it were to capture 20% the projected market share in the video ads RTB industry, Adapt.tv alone can generate over $500 million in revenues. This would translate into over $1 billion in revenues. Additionally, we also expect that AOL’s RPM will increase due to better management for unused video ad inventory and better sales to advertisers. Currently, we project that RPM will grow to $5 by the end of our forecast period in 2020. If RPM increases to $7 instead, our price estimate gains an additional 15%.
We currently have a $33.88 price estimate for AOL, which is approximately 25% below the current market price.Notes:
- US Total Media Ad Spend Inches Up, Pushed by Digital, August 22 2013, www.emarketer.com [↩]
- Digital Video Takes TV Dollars, August 20 1013, www.emarketer.com [↩]
- Shifting Up to 15% of TV Ad Spend to Online Builds More Effective Reach at a Lower Cost, According to New Research from IAB, February 25 2013, www.iab.net [↩]
- RTB Ad Spend Continues Robust Growth, August 23 2013, www.emarketer.com [↩]