AOL Inc. (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 foraying into the emerging “programmatic TV” buying space. The company acquired PrecisionDemand that will be integrated into Adap.tv and AOL’s ONE advertising platform. Adapt.tv is one of the biggest platforms for buying inventory on digital video, and through this acquisition it has strengthened its portfolio for placing ads on linear TV. In this article, we will size up the video ads industry, and how AOL’s Adapt.tv can boost AOL’s revenue in the future.
Trends In Video Ads
Over a period of time, the video advertising industry has become fragmented, primarily due to the growing popularity of online video streaming. As a result, advertisers now have to mange their ad budgets across different media and screen sizes. While TV ad spending was at $75 billion in 2013, online video ad spending was close to $2.8 billion during the year, according to IAB. Furthermore, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices.
However, online video ads cost per impression (CPM) still lags TV CPM. While a Turns study estimates that cost per impression (eCPM) for online video is in the $8-$12 range, TVB estimates this at $25 for TV. We expect TV and digital video advertising spend to converge as multi-platform and multi-screen video advertising get integrated.
Adapt.TV To Leverage It RTB Muscle To Power AOL’s Revenues
Over the past few years content providers have been increasingly adopting ad-exchange mechanisms that use 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.
According to our estimates, Display Ads on third party sites is AOL’s largest division and makes up 35% of its value. AOL is aggressively developing its RTB platform. 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.
Post the acquisition of PrecisionDemand, Adapt.tv now has complete programmatic video technology stack across all screens, with different form factors, available in the market place. While the AOL-Adapt.tv combination consistently ranks among the top 10 video ad properties by video ads viewed list, the acquisition has given it tooth to explore the programmatic TV ads vertical.
According to PrecisionDemand CEO Jon Mandel, the company uses first-party data, target[s] real consumers and find[s] them by going many hundreds of variables deep. AOL is gunning for linear TV ad dollars, but a report from Free Wheeler states that only a limited amount of this inventory is available to third-party ad networks or exchanges, and premium programmer content is still bought and sold largely direct. AOL hopes that Adap.tv, via PrecisionDemand, can get hold of some of this supply.
If RTB captures 29% of the $9 billion online video ad spending, the total addressable market for Adapt.tv is approximately $2.7 billion. Currently, Adapt.tv leads the U.S video ads industry, and has a 12% market share in it. At present, we project revenues from third party sites to be at $700 million by 2020. However, if it were to capture 20% the projected market share in the video ads RTB industry, Adapt.tv alone can generate over $500 million in revenues. This would translate into over $1 billion in revenues. Furthermore, the company can now target the $75 billion TV ads industry. If it could get only 0.5% of this market, the company can rake in an additional $350 million in revenues.
Additionally, we also expect that AOL’s RPM will increase due to better management for unused video ad inventory and sales to advertisers for both online and offline channels. Currently, we project that RPM will grow to $5 by the end of our forecast period in 2020. If RPM increases to $7 instead, our price estimate gains an additional 15%.
We currently have a $37.79 price estimate for AOL, which is approximately 4.5% above the current market price.
Disclosure: No positions