How AOL Can Drive Ad Revenue Growth On Its Properties

November 29th, 2012 by Trefis Team
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Can AOL (NASDAQ:AOL) grow its struggling display ads business? We think it can. The display ads business on its own sites, which makes up around 25% of the company’s value, has been struggling over the last three years. And unless AOL is able to reverse the historical trend, we could see its stock fall from its current market price of $36.

To improve the health of its display business, we think AOL must make changes to its sites in order to drive page views per user. Additionally, we think the company should continue to invest in video, a segment which presents a lucrative opportunity over the next 3-5 years. 

Click here to see our complete analysis of AOL

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What’s the historical trend?

Over the last three years, AOL has seen its display ad revenues on its properties decline a substantial amount. Part of the business which brought in $1.2 billion in revenues during 2009 only brought in $930 million in revenues in 2011, a decline of almost 23%. [1] However, the year-over-year trend that AOL posted during Q3 2012 was encouraging as the company grew its ad revenues on search and international display revenue growth. What was worrying however was that domestic display ad revenues fell again, a trend that the company must reverse if it wants to improve profitability. ((AOL 8-K, SEC))

What can AOL do to drive page views on its properties?

Currently, the content on AOL.com is primarily news based. While this model can generate a few page views as users come to AOL, the recent upstart in online newspapers and blogs, combined the movement of newspapers such as New York Times (NYSE:NYT) online, decreases the chance that AOL will provide unique value to users via news.

Therefore, instead of improving its native news quality, we think that AOL should leverage Huffington Post, a news site it already owns. It should add the content from Huffington Post (HuffPo) to AOL.com to set up redirects in a way that users consume HuffPo content on AOL.com sites. Additionally, we think that AOL needs to create a Google (NASDQ:GOOG) like bar via which a user has access to multiple AOL properties and services at the click of a button.

We recommend this because AOL’s lack of connectivity among sites is a hindrance to maximizing page views per user on its properties. If the company does what we recommend, a user coming to AOL to read HuffPo could be directed to the company’s other offerings such as Lifestyle, Shopping, Games, etc. The key for AOL is to integrate all of its businesses that it has acquired over the past few years in a way that it can maximize page views per user.

Should AOL invest in video?

We think that one of the most lucrative opportunities in the online market today is the online video space. AOL has been pushing this part of its business over recent quarters via its platform AOL On, which provides a library of premium videos. Additionally, it has created an online news network in the form of HuffPo Live, which features streaming news programming throughout the day.

We think that AOL must continue to focus on expanding its video business because online video advertising is set to become one of the biggest parts of the display advertising mix, reaching approximately $9 billion in total spending by 2017 from $3 billion in 2012. [2] The only bigger contributor to display ad spending is rich media (excl. video) ads, which will grow to $11 billion by 2017.

If AOL is able to get even 5% of the ad spending market by 2017, it could increase its revenues by $400 million, an increase of 25% compared to current levels. We believe this is achievable, especially if AOL focuses on providing quality videos to a growing online video consumer base, which, according to eMarketer, will hit almost 200 million in the US by 2015. [3]

We currently have a $29 price estimate for AOL, which is approximately 20% below the current market price.

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Notes:
  1. AOL 10-K, SEC [↩]
  2. Forrester: US Online Display Ad Spend $12.7B In 2012, Rich Media + Video Leading The Charge, TechCrunch [↩]
  3. Online Video Use Exceends 84%: Marketers Rush to Video Ad Spending, SocialMediaToday [↩]