Will AOL’s New Ads Platform Boost Revenues?

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AOL ( AOL ) started out as a big player in the dial-up Internet space but transitioned into a company that relies on content and ads to drive revenues, as subscribers shifted to broadband Internet services. AOL has adopted a barbell sales strategy that offers programmatic advertising on one end and deep marketing services or premium buys on the other. It is ramping up its real-time bidding platform (RTB) through in-house development and acquisition. Additionally, to address premium ads, AOL has launched a host of new ad formats to lure advertisers to its properties. In this article, we will look at AOL's ad strategy.

See our complete analysis of AOL here

Online Ad Sales Explained

Before the advent of programmatic buying, digital content publishers sold ads directly to advertisers through ad networks. The ad inventory listed by a publisher was matched to advertisers based on their target preferences (which includes demographics, geographic, contextual preferences etc) for a predefined fixed or static price. If an agreement between an ad publisher and advertiser was not reached, the network moved the inventory to the next advertiser in line. However, this mechanism is inefficient and often fails to match ad inventory with a prospective advertiser. As a result, publishers lose out on revenue and advertisers lose out on getting cheap ad placements.

Over the past few years publishers have been increasingly adopting ad-exchange mechanism that uses 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.

AOL's Display Ads Strategy

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.

AOL ad formats such as Project Devil and Digital Billboard continue to gain traction with advertisers for premium buys. However, AOL is aggressively developing its RTB platform as well. 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. While the company acquired adapt.tv to bolster its demand side platform (DSP) for video ads, its supply side platform ( SSP ) ADTECH Marketplace continues to support publishers by effective management of unused ad inventory.

We think AOL is well positioned to capture a bigger chunk of RTB spending in the future by leveraging its DSP and SSP. If AOL manages to capture 10% of this spending in the U.S. by 2017, its display ads revenue can double. Additionally, we also expect that AOL's RPM will increase due to better management for unused ad inventory and better sales to advertisers. Currently, we project that RPM will grow to $3.60 by the end of our forecast period. If RPM increases to $5 instead, our price estimate gains an additional 15%.

We currently have a $27 price estimate for AOL , which is approximately 20% below the current market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AOL , GOOG , MSFT , SSP , YHOO

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