As AOL Looks To Shut Down Websites, It Should Invest In Ad Platform And Content

by Trefis Team
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In its efforts to improve profitability, AOL (NYSE:AOL) is considering shuttering some of its websites, according to a person with knowledge of the matter (reported on Bloomberg.com), as it looks to restructure its business. [1] AOL has been selectively selling its non-profitable products so that it can focus on improving its ad tech platform, core content verticals and offer new products for these profitable services. We think that selling these non-profitable websites is a step in the right direction as users currently throng to premium content websites such as Huffington Post, Engadget etc. However, the industry is highly competitive with a number of players and AOL has not been able to monetize its properties, which has resulted in it developing an Ad-tech platform. The company has been aggressively targeting programmatic advertisement. This restructuring is important as AOL can now free up some cash to plough back the money into its newly launched Ad-tech platform  and developing content for its existing premium platforms. In this note, we explore why the company needs to pursue this strategy.

See our complete analysis for AOL here

AD-Tech Platform To Boost Revenues

In the last few years, online ads technology has undergone a rapid transition, largely due to technological and cultural shifts.  There have been innovations in how ad slots are bought and a proliferation of new contexts in which ads are viewed, including smartphones, tablets, online videos and social networking sites. With this profusion has arisen a degree of chaos in online advertising, which has created complexities for brand managers, agencies and publishers who are required to sort through the sprawl of available choices.

According to eMarketer, advertisers’ spending on programmatic platforms will increase to $8.36 billion this year in the U.S. alone. It projects that overall spending in programmatic will increase to $20 billion by 2016. [2] We think AOL is well-positioned to capture a bigger portion of programmatic spending in the future by leveraging its demand side platform (DSP) and supply side platform (SSP) for both video and static display ads. While AOL doesn’t disclose the breakup of its revenues from its RTB platform, if AOL were to capture 10% of this spending in the U.S., its display ads revenue from third-party could double by 2016.

According to our estimates, the third-party display ads division constitutes over 41% of AOL’s value. In the third quarter, revenues from third-party display ads continued to generate strong growth. Revenues from this division grew by 44% to $215 million, driven by growth in the sale of ads across AOL’s programmatic platform and by the inclusion of revenue from Adap.tv. Third-party network revenue grew 23%, excluding Adap.tv. AOL is aggressively developing its programmatic ads platform to sell more ads on third-party sites. Furthermore, the company’s platform is focusing on delivering ads not only across different platforms (such as tablets, mobile devices and desktops) but also across different formats (i.e., videos, contextual search, etc.)  As a result, the cross–screen campaigns have allowed the company to report substantial growth in the number of ads sold through the programmatic platform.  It also generated an increase in revenue per page view. We believe that a strong programmatic platform will be a key driver in boosting AOL’s revenues by closely matching an advertiser’s ads with relevant content inventory. RTB (real-time bidding) 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. Furthermore, with cross screen platforms, ads served through programmatic platforms are shown over mobile devices, desktops and tablets. With relevant ads displayed across content, AOL can continue to charge higher revenue per page view (RPM) to advertisers. Currently, we expect revenue per page view to grow from $5.21 to $7 by the end of our forecast period.

Why AOL Needs To Invest In Content

According to our estimates, AOL currently derives 28% 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 existing properties to increase user engagement so that it can challenge competing websites such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO). In the past, the company not only was among the top 3 players in content videos and video viewers’ category but also served over 5 billion video ads. This improvement in video offerings translated into overall growth in the number of unique visitors across AOL properties, which grew to 200 million with almost 50% of traffic (110 million users) being mobile. Going ahead, if  AOL can increase its user base by offering better and engaging user content across more geographies, it can further increase its unique visitor count and pageviews.

We currently have a $41.97 price estimate for AOL, which is approximately 13% below the current market price.

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Notes:
  1. AOL Considers Shutting Down Some Websites, January 20 2015, www.bloomberg.com []
  2. 7 Advertising Trends That Show You Exactly Where This Industry Is Headed Mobile and programmatic are changing everything, October 16 2014, www.adweek.com []
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