AOL: Programmatic Ads And Connected TV Partnerships To Boost Revenues
America Online (NASDAQ:AOL) disappointed the Street in the February earnings call with its guidance for 2015. While the overall revenue might decline sequentially this quarter, the year-ahead trends remain positive as AOL’s revenue from new verticals such as the programmatic platform and video ads gain increasing momentum. Recently, the company has taken some of the steps to shore up revenues. AOL has tied up with Facebook’s marketing partner Kenshoo. AOL’s One platform clients can now access Kenshoo’s social inventory, thus enabling them to promote videos across Facebook and Twitter and to a target audience.  Furthermore, it recently launched its first long-form original series, Connected, which will be available exclusively to Roku users via the AOL On app.  In this note, we explore how AOL’s is targeting programmatic ads and connected TV to boost its revenues in the future.
See our complete analysis of AOL here
Programmatic Platform Is The Key
- U.S. Digital Advertising Landscape And Key Players (Part 2)
- U.S. Digital Advertising Landscape And Key Players (Part 1)
- With AOL In The Bag, What’s Next For Verizon?
- AOL To Be Acquired for $4.4 billion By Verizon
- AOL Earnings: Third Party Ads Boost Revenues Yet Again
- AOL’s ‘ONE by AOL’ To Boost Its Programmatic Ad Platform
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 $14.88 billion this year in the U.S. alone.  This firm also predicts that digital video will be the fastest-growing area of programmatic investment, attaining a growth rate of 204.3% this year. But overall, programmatically traded dollars will account for just 28.0% of all US digital video ad spending in 2015. Furthermore, more than half of all US programmatic digital display ad spending will be from mobile, inline with the online advertising trends in the U.S. 
According to our estimates, the third-party display ads division constitutes over 42% of AOL’s value. In 2014, revenues from third-party display ads continued to generate strong growth. Revenues from this division grew by 40% to $856 million, driven by growth in the sale of ads across AOL’s programmatic platform and by the inclusion of revenue from 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. AOL is merging its backend systems into more a robust and scalable platform, which has resulted in tempered guidance for display ads in first half of 2015. However, we believe that 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 real-time bidding (RTB) platform, if AOL were to capture 7% of this spending in the U.S., its display ads revenue from third-party could be over one billion dollars in 2015. This should more than offset the expected decline in revenues in the coming quarters.
AOL’s partnership with Kneshoo will enable its clients to advertise over social media and across mobile devices, desktops and tablets. The partnership will also give AOL’s clients access to Kenshoo’s proprietary predictive and first-party audience technology for targeted ads on Twitter and Facebook. With relevant ads displayed across content and channels, AOL can charge higher revenue per page view (RPM) to advertisers. Currently, we expect revenue per page view to grow from $5.21 to $7.00 by the end of our forecast period.
More Content On Connected TV To Bolster Revenues
According to our estimates, AOL currently derives 25% 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. 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. AOL extended its reach to connected TVs in 2012 with the launch of its AOL HD app. However, until recently it was focusing on shorter “docu-style” original content. However, over the past year the company has invested more into its online video offering, and plans to produce 16 original unscripted short-form series and long-form original content for connected TV. The first of this long-form content is digital series Connected, which will be available on Roku. Through this offering AOL is targeting connected TV industry, which is still uncharted territory for AOL’s advertising revenue. However, if AOL can increase its user base by offering better and engaging user content across connected TV, it can further increase its unique visitor count and pageviews for its videos. This will lead to overall improvement in display ad revenues in the future.
We currently have a $42.41 price estimate for AOL, which is approximately 7% above the current market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
- AOL Partners With Facebook Marketing Partner Kenshoo, March 20 2015 [↩]
- Media Alert: Exclusive Series Preview of AOL’s ‘Connected’ Available on Roku Platform, March 23 2015 [↩]
- Programmatic to Make Gains in Connected TV, OTT Video , February 11 2015 [↩]
- Mobile Will Account for 72% of US Digital Ad Spend by 2019, March 24 2015 [↩]