Fifteen years ago, AOL (NYSE: AOL) controlled the display ad market with an iron fist. How times change. Even with online ad purchases on the rise for the first time in two years, AOL’s search and contextual advertising revenue fell by -27% year-over-year in their fiscal first quarter in addition to a drop of -29% for their display advertising.
What’s AOL’s big plan to compete in a field where they are increasingly irrelevant? Bigger, brighter, more invasive ads. Precisely what Web surfers want, of course.
While they’re still a player, AOL’s only real competitor in the advertising space is Microsoft (NASDAQ: MSFT). Both companies have managed to make around $1 billion in ad revenue over the past five years. They’re eclipsed by Google (NASDAQ: GOOG) though, whose contextual advertising empire generated just under $8 billion in 2009. Even Facebook, while not pulling in the same amounts of money, is beating out AOL, its ads accounting for 16% of all ad impressions online in 2010.
AOL’s brand new ad format, set to debut during the Advertising Week conference in New York scheduled for the end of September, will include space for three separate functions chosen by the advertiser. These include Facebook and Twitter updates, text messaging, photo galleries, video, maps, and coupon placement. For physical goods, the ads will allow users to examine the product in a 3D view as well as follow links to instantly purchase it. The ads will be four times larger than those currently on AOL’s homepage. AOL Chief Executive Tim Armstrong said that the new ad format is the result of, “[An] amazing partnership with the world’s most innovative agencies and advertisers. Change is afoot.”
If Armstrong is trying to imply to AOL investors that change is afoot in regards to the company’s fortunes, he’s got another thing coming. Just as AOL has been slow to realize that readers and consumers on the Web are increasingly unwilling to tolerate subscription fees of any kind for digital media service, they are slow to recognize that non-intrusive Web browser advertising is more likely to capture the attention of consumers.
Hence Google’s monumental success in the field. The ignorance of Google’s strategies with video ads on YouTube and in contextual advertising across the Internet is baffling considering Armstrong’s background as an ad executive with Google Inc.
It’s also a grave miscalculation to pursue new display advertising initiatives for Web browsers when AOL should instead be finding ways to infiltrate the emerging mobile operating system advertising market.
AOL is currently trading at around $23, down slightly since Jan. 1 compared to a small gain in the Dow. AOL is off -8% in the last 12 months against a +2% gain for the Dow Jones. With analysts predicting further declines in the next two quarters and the company losing market share in online advertising by the day, introducing high-tech but anachronistic display ads is hardly the way to boost investor confidence.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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