America Online (NYSE:AOL) is in the middle of transforming its business focus from content to ad technology. According to CEO Tim Armstrong, the company has adopted a barbell sales strategy that offers programmatic advertising on one end and deep marketing services or premium buys on the other. In a fresh move, the company has intensified its efforts to capture a bigger chunk of the programmatic ads industry by consolidating its programmatic platform under a unified offering called ONE. In this note we will look at AOL's offering and how the programmatic platform can boost the company's revenues.
What Is ONE By AOL?
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.
AOL plans to address these complexities by consolidating its programmatic platform under its ONE offering. According to AOL, ONE will provide a single, unified, enterprise-level platform for driving powerful brand insight and marketing executions across all screens, formats and inventory types.  ONE boasts of an open ecosystem where partners and competitors, publishers and marketers are all beneficiaries of a more seamless and efficiency-focused technology landscape.
Programmatic Platform To Boost Revenues
In a previous article, we had argued that a programmatic platform would be a key driver to AOL's future revenue growth. To summarize, AOL's real time bidding platform (RTB) can be instrumental in increasing revenue per 1,000 impressions (RPM) by efficiently matching ads with relevant ad content. The company's demand side platform, Advertising.com, has a visitor reach of 85% and has been consistently ranked second behind Google's ad network for the past few quarters.  Furthermore, with the launch of Marketplace in 2013, AOL has access to the complete stack of advertising technology that can offer a full-service solution to premium advertisers and publishers alike. The capabilities of AOL's programmatic platform have been further augmented by the acquisition of Adapt.tv in the third quarter of 2013. According to comScore, AOL sold nearly 4.3 billion ad impressions in the U.S. in December 2013.  By comparing pre-acquisition and post-acquisition ad impression numbers, we estimate that Adapt.tv constitutes for over 50% ad impressions sold in December.
According to eMarketer, advertisers spent $4.8 billion on programmatic platforms in 2012 in the U.S. It projects that this spending will increase to $7.5 billion in 2013. eMarketer also expects that programmatic buying will grow to $16.9 billion in the U.S. and $32 billion in the world by 2017. (Is the Future of Programmatic Premium?, December 4, 2013, www.emarketer.com). We think AOL is well-positioned to capture a bigger chunk 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 2017.
Our price estimate for AOL is $41.51, which is in line with its current market price.
Disclosure: No positions.