America Online (NASDAQ:AOL), which was once a Internet subscription giant, is transforming its business. Apart from focusing on ad technology, it is also increasing its portfolio of video content. In the past few quarters AOL has launched a slew of new original video content spanning across auto, entertainment, tech, style, business, sports and food sectors. Furthermore, the company has intensified its efforts to capture a bigger chunk “programmatic TV” buying space by acquiring PrecisionDemand last month. In order to monetize its video content library further, AOL has announced that its complete library of over 900,000 premium videos is now available on Apple TV.  While the project is still in its early stages, we think it is worth examining how this offering can help AOL to increase its revenues.
TV Ad Dollars Exceed Online Video Ads
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Even though growth in online ad spending is increasing at a robust pace, TV ad spending still makes up major chunk of ad budgets. While TV ad spending was at $75 billion in 2013, online video ad spending was close to $2.8 billion during the year, according to IAB.  Furthermore, TV ads cost per impression (CPM) exceeds online video ads CPM. A Turns study estimates that cost per impression (eCPM) for online video is in the $8-$12 range,  while TVB estimates this at $25 for TV. 
Considering the difference between the two CPMs, online video content providers are jostling for mind space in the urban household. The advent of mobile dongles such as ChromeCast and Apple TV that allow users to stream videos from the Internet to their TV, has given these content providers avenues to boost their revenues.
AOL’s RPM Can Increase.
With the availability of its online video content on Apple TV, AOL can further strengthen its position in online video streaming. A user can now stream AOL’s video content to his or her TV using Apple TV. Currently, Apple TV has an installed base of 28 million, according to Horace Dediu of Asymco.  This installed base reflects the number of new household that AOL can reach through Apple TV. We believe that as AOL’s household reach increases, AOL can charge higher RPM for ads displayed on such video streams. Currently, we estimate RPM for AOL’s display division to grow from $3 in 2013 to $3.40 by 2020. If AOL can increase RPM to $4.50 by the end of our forecast period, our stock price estimate will increase by 5%.
We currently have a $37.79 price estimate for AOL, which is inline with the current market price.
- AOL On Content Now Available on Apple TV, June 24 2014, blog.aol.com [↩]
- 2013 Internet Advertising Revenue Full Year Report, April 10 2014, www.iab.com [↩]
- Global eCPM Trends in Q2, July 15 2013, www.marketingcharts.com [↩]
- TV Cost & CPM Trends- Network TV Primetime, May 28 2013, www.tvb.org [↩]
- Apple TV sales topped $1B in 2013, becoming Apple’s fastest growing hardware, Feb 28 2014, www.appleinsider.com [↩]