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AOL, Inc. (AOL): Competing With Content

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AOL, Inc. (NYSE:AOL)When Time Warner Inc. (NYSE:TWX) bought AOL, Inc. (NYSE:AOL) at the height of the dot-com bubble it paid $165 billion. Today, the company is valued at less than $3 billion. To say the purchase was “the biggest mistake in corporate history,” as Time Waner CEO Jeff Bewkes put it, isn’t too much of a stretch.

But the company’s tenure under the wings of Time Warner apparently rubbed off. AOL started reinventing itself as a content company after its spin-out in 2009. While no longer an internet behemoth itself, AOL is poised to take on the new giants of the internet.

Social content

AOL’s biggest move since the spin-off was purchasing the Huffington Post for $315 million in 2011. AOL has invested heavily in the news and opinion site, expanding the website internationally to Europe, and plans to launch in Japan next month. Additionally, AOL launched HuffPost Live last year, providing 60-hours of live video commentary every week.

The Huffington Post specializes in headlines designed to go viral on social networks. Just looking at the website right now provides clickable headlines such as “19 Products You’d Have to be Stoned to Come Up With” and “Zooey Deschanel Misidentified as a Boston Bombing Suspect.” Considering 27% of time spent on the internet in the U.S. is used browsing social media sites, the strategy has done well leveraging that trend, and attracting an audience to the second most popular internet activity – entertainment.

The combination of viral headlines and placement in aol.com’s curated content portal resulted in fantastic visitor numbers growth. Since its purchase in 2010, HuffPo’s traffic more than doubled to 62 million unique visitors last month, making it the fourth-most-widely-read news site in America.

The progress at HuffPo isn’t echoed, however, amongst all of AOL’s media brands. In particular, Patch, the hyper-local news network, has been largely disappointing. While AOL expected $40 million to $50 million in revenue from Patch in 2012, it came in well short with just $34 million in sales. CEO Tim Armstrong still says the network ought to be profitable by the fourth quarter of 2013.

Video content

Most people know that Google Inc (NASDAQ:GOOG)’s YouTube is the most popular video streaming site in America. Few are aware that AOL operates the second largest online video network. Not only does it operate HuffPost Live, the AOL On Network draws in 35 million unique monthly visitors.

Unlike Google’s YouTube, which puts the content production in the hands of the many, AOL curates its content. It’s AOL’s attempt at capitalizing on cord-cutters looking for a new outlet for entertainment, business, news, and other videos.

The online video market is growing, and ad-budgets are pouring more money into the outlet. Online video advertising is expected to top $4.1 billion this year, up 41% from 2012. Meanwhile, the number of online video outlets is increasing rapidly, putting a drag on margins and ad prices, which fell 10% to 15% last year.

Interestingly, online video ads have achieved price parity with television ads. This presents an opportunity for online video to take ad-share from television. YouTube recently started increasing its investments in “channels” and commissioning original content. I see this as an effort on Google Inc (NASDAQ:GOOG)’s part to get users (and advertisers) to see YouTube as a viable alternative to television programming and spend more time (money) on the site.

Advertising

Another significant portion of AOL’s new strategy is growing its ad network. Earlier this month, the company launched its supply side platform, Marketplace by AdTech. The platform is a direct shot at Google Inc (NASDAQ:GOOG) and Adobe Systems Incorporated (NASDAQ:ADBE), which run similar services for publishers. AOL aims to decrease the complexity of using multiple companies to sell and serve digital advertisements. Additionally, AOL offers a higher percentage than the usual 50% cut its competitors offer.

As a content publisher itself, AOL has a unique insight as to what publishers want or need out of an ad-selling and serving network. This vertical integration ought to prove beneficial in time as the nascent platform grows.

Last month, the company partnered with Facebook Inc (NASDAQ:FB) to bring in the huge inventory of ad-impressions that Facebook Exchange provides. While Adobe also joined the fold, Google remains uninvited. As a result, AOL gains valuable knowledge that allows them to compare ad efficacy on Facebook compared to other outlets including its own websites. It can then share this knowledge with clients to improve their returns.

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