2010 may turn out to be a pivotal year for web company AOL (NYSE: AOL). The former Time Warner (NYSE: TWX) partner has been slowly clawing its way back to relevancy after years of decline. Where other stalwarts of the Internet boom like Yahoo! (NYSE: YHOO) and News Corp.‘s (NYSE: NWS) Myspace.com are failing to find an effective strategy to redefine their service and brand, AOL is showing signs of health and potential.
The one-time giant isn’t likely to regain the prominence in the Web business space it held in the late 1990s, but it is on its way to begin earning for shareholders again. AOL brave new future started with the November relaunch of AOL.com, a wholly new version of the company’s flagship property with an emphasis on original video programming.
The new AOL.com, launched at the end of last week, is aimed at a media-savvy audience that covers the gamut of age and gender demographics according to the company. This is precisely the wide-ranging audience that abandoned AOL for other web services like Google‘s (NASDAQ: GOOG) Gmail and social networks like the aforementioned Myspace and Facebook over the past six years. It is also the audience whose indifference to AOL has cost the company their once dominant role in the display and contextual advertising business online.
AOL has ceded even more control of the online ad market to Google in the past year; revenue generated by the company’s search and contextual advertising dropped by -27% year-on-year at the beginning of 2010, while display advertising crumbled by -29%.
Video and an emphasis on local services is what AOL believes will bring back both the lost audience and in turn the lost advertising revenue. AOL’s wide-ranging partnership with Fred Seibert’s Next New Networks—a prominent professional video content provider for outlets like Google’s YouTube and Disney (NYSE: DIS)—comes with daily video content including short-form shows The ONE and AOL Daybreak. Daybreak will be a daily news program hosted by actress and Next New Networks programming regular Lindsay Campbell. The ONE is a two-minute daily feature highlighting a viral trend in politics, entertainment, business, and culture with commentary from a variety of comedians, pundits, celebrities, and experts. The site also pushes social network sharing tools with its morning, daytime, and evening news updates.
AOL announced just today that it’s developing more original programming with Michael Eisner’s independent studio Vuguru to provide AOL with scripted programming. The deal will produce six new shows that will run 90 minutes in length but will air in smaller segments similar to previous Vuguru programming like the Prom Queen series. A timeline was not given for when the new shows would begin playing at AOL.com.
The programming with both Vuguru and Next New Networks will be used to roll out AOL’s new advertising format. Announced earlier this fall at the Advertising Week conference in New York, the new dense ads hosted by AOL include space for text messaging, photo galleries, maps, video, coupons, and Facebook and Twitter integration for advertisers to leverage. Physical products advertised can also make use of a new 3D object viewer in the ad format.
These are promising times for AOL. Shares in the beleaguered company surged following a strong third quarter earnings report made last week. Revenue was down -26% year-on-year, down to $563.6 million compared to $763.9 million during the same period in 2009, while advertising revenue continued to plummet as well, remaining down -27% from 2009. Net income, however, showed a dramatic improvement over last year, jumping up to $171.6 million after 2009’s $74 million during the same quarter. Shares are trading today at just below $27, just below the company’s 52 week high of $29.45.
Miller Tabak downgraded its guidance on AOL at the end of last week to Neutral rather than Buy, setting a target price of $38. Right now, though, investors willing to spend a bit more might be wise to pick up AOL. If the rumors of a merger with Yahoo prove true, Miller Tabak’s target price may end up proving a bit conservative. Buy now with confidence.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
