AOL Video Ad Victory: Smaller Than It Seems

by Jonathan Berr | October 21, 2013 2:08 pm

AOL Video Ad Victory: Smaller Than It Seems

When AOL (AOL[1]) closed on its $405 million acquisition of Adap.tv earlier this year, CEO Tim Armstrong declared that the move — the largest acquisition ever for AOL — would help further solidify its “leadership position” in digital video.

And at first blush, Armstrong’s plan seems to be coming to fruition. According to recent data from ComScore, AOL sites served the most video ads in September with 3.7 billion, surpassing Google (GOOG[2]), which served 3.2 billion ads.

Unfortunately for AOL — and investors in AOL Stock — this statistic doesn’t look as promising once rates are taken into account.

See, many of the ads sold on Adap.tv — which is an online ad video marketplace — fetch rock-bottom prices. The CPM (cost per thousand impressions) on Adap.tv averaged about $10.30 in August, according to data from SQAD, an ad cost tracking and forecasting firm. That’s well under $15 earned by the AOL Media Network. And while the same source didn’t have data for Google, recent data from Credit Suisse shows that the average CPM for the search giant this year is $24.60.

Part of the reason for the low rates and high quantity is the fact that Adapt.tv is a programmatic service where ad sales are transacted in automated system — a growing trend in advertising. Currently, programmatic sales account for 53% of display advertising but only about 20% of video sales. But Adap.tv founder Amir Ashkenazi[3] thinks most video ad sales will be transacted programmatically in the future.

Ashkenanzi may be right, but advertisers don’t simply look at rates. Instead, other factors matter as well, including unique video viewers. Google, thanks to YouTube, attracted over 165 million in September, for example. Facebook (FB[4]) ranked second with just over 67 million, while AOL was third with less than 62 million.

Google sites were also the leader for what is known as user engagement — and by a long shot. That’s a fancy way to describe how long users stay on a site; longer time means a higher chance of seeing ads. Google sites averaged 462 minutes per user for online videos in September. AOL, the parent of The Huffington Post, had 60.8 minutes, lagging Yahoo (YHOO[5]), which had 63.7 minutes. AOL’s figures did beat Microsoft (MSFT[6]) sites and Facebook, though.

So the sheer quantity of AOL video ads served is not going to be seen AOL stock … and the proof is in the pudding.

Shares of AOL stock have climbed around 18% this year, while Yahoo stock has soared 70%, Viacom (VIAB[7]) has jumped more than 58% and Twenty-First Century Fox (FOXA[8]) has gained 35%. Plus, the broader S&P 500 has also gained more than 22% since the start of the year.

In fact, expectations are modest heading into AOL earnings next month. Revenue in the current quarter is expected to grow just over 3%, while full-year sales are only expected to expand 3.4%.

The lesson is clear: While Armstrong may be able to make some decent money off Adap.tv, it’s hardly the game-changer some expect. And while video is certainly an integral part of Armstrong’s strategy, there’s a good chance investors are going to focus on other areas when the company reports its quarterly results on Nov. 4.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter@jdberr.

Endnotes:
  1. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. Amir Ashkenazi: http://www.forbes.com/sites/jeffbercovici/2013/10/17/aol-passes-google-to-become-no-1-in-video-ads/
  4. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  5. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  6. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  7. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB
  8. FOXA: http://studio-5.financialcontent.com/investplace/quote?Symbol=FOXA

Source URL: http://investorplace.com/2013/10/aol-video-ad-victory-smaller-seems/
Short URL: http://invstplc.com/1aLQJ7t