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AOL (NYSE:AOL), which competes with Yahoo (NASDAQ:YHOO) and Google (NASDAQ:GOOG) in the display advertising market, is looking to increase user engagement with display ads by introducing more interactive ads according to a recent report in the WSJ. Higher ad engagement can lead to higher prices paid by advertisers for ads and thereby potentially boost AOL’s stock. We believe, however, that the impact to AOL’s stock of such a strategy will be small and the uptick in user engagement may be temporary.

AOL’s Declining Ad Revenue per Page

We estimate that display ads on AOL sites constitute around 32% of the $25 Trefis price estimate for AOL’s stock. We estimate that AOL’s ad revenue per page view has declined declined from a little over $4 per 1,000 page views in 2007 to about $3 in 2009, and we believe it could decline further to $2.65 per 1,000 page views by the end of Trefis forecast period.

Modest Upside from New Ads

AOL is introducing larger ads which will have special features such as photo galleries, videos, updates from Facebook or Twitter, and the ability to zoom in and out of a 3-D view of a product. Such features can initially increase user attention and engagement, leading to demand from advertisers for such ads. Over the long-term, however, users are likely to develop greater awareness of such ads and may become accustomed to avoiding them, meaning that the user engagement boost from such a strategy may be temporary.

Even if AOL’s new strategy help to prevent AOL’s revenue per page from declining further (as we have forecast), the impact on our estimate for AOL’s stock would only be about +3%.

Disclosure

: No positions

Source: Will New Display Ads Drive Value for Aol’s Stock?