Companies & Industries

Why AOL bought It's programmatic

Programmed preferences

AOL CEO Tim Armstrong announced his largest acquisition for the company to date this week. More importantly, he also showed the online industry that his company is hedging its bets on a new advertising technology analysts say we have yet to understand.

With its US$405 million purchase of Silicon Valley-based, a company specializing in connecting online video advertising buyers and sellers, AOL has acquired software that will allow it to engage in programmatic advertising—using algorithms to place targeted video ads in front of viewers according to their perceived preferences. For example, viewers of AOL’s new HuffPost Live productions might be served with different video ads than those who are streaming content from other AOL-owned websites, such as TechCrunch or the StyleList.

Just as consumers have shifted their media-viewing behavior away from traditional mediums like television, advertising dollars previously spent on TV ads are migrating to the digital world as well. But the digital world of advertising is shifting too, away from simple traditional display ads (which are really just digital recreations of the ads we see in print), to “higher-end” interactive and video ads, which are more likely to engage consumers. Since video has become a major focus for AOL,, which specializes in video and has dealings with 83 of the top 100 Ad Age advertisers, “essentially provides the technology and the relationships to help facilitate that shift at a faster rate for AOL,” said Telsey Group analyst James Cakmak.

The concept of delivering the rights ads to the right consumer in real time seems simple enough, but analysts still aren’t sure of the impact that programmatic advertising will have on the online ad market.

According to Pivotal Research Group analyst Brian Wieser, there will be a few winners and potentially many losers in the online ad marketplace, as digital advertising shifts away from premium display ads and towards programmatic.

“Changes in advertiser preferences towards programmatic buying are causing what we characterize as a permanent decline in traditional premium display advertising,” Wieser wrote in recent report. The shift has already caused some negative results for Yahoo, a leader in display advertising, but Pivotal expects Google, Facebook, and a handful of other big players to be the beneficiaries of this shift.

The question is whether AOL will be among them.

The company has been working to increase its video assets in recent years, particularly with the purchase of rich-content syndicators 5Min Media in 2010, and the launch of its video library AOL On.

Analysts have also reacted favourably to the purchase.

In a report released by Jefferies on Wednesday, the firm noted that AOL and Adap.TV rank among the top 50 video properties in terms of unique users, as ranked by ComScore. Google sites top the list with about 167 million unique visitors, while is in the third spot with 120 million, followed by AOL in seventh place with about 75 million.

“There’s probably some overlap,” but you could basically take the numbers for AOL and, add them together, and see that AOL is now in a unique position “in terms of unique viewers and average daily viewers across all the pages on those two businesses,” said Jefferies analyst Brian Pitz in a phone interview.

Pitz believes AOL will benefit from its transaction. Bottom line, programmatic is the direction that the online advertising industry is moving, Pitz said, “so I look at this as an acquisition that keeps them moving their business in a forward direction rather than keeping them behind.”

As to whether or not will be able to maintain its advantage amongst the many companies now looking to provide their video ad services, “I would assume that the technology is differentiated, and it’s the reason that AOL wanted it, so they should be able to sustain their advantage,” said Pitz.’s impressive financial performance in a short period of time has also caught the eye of analysts.

AOL has suggested that’s revenue was around US$75 million in 2012, and that the company’s revenue growth was up 200% in 2011, and 100% in 2012, noted Pitz.

“Using those growth numbers, that would imply that 2011 [revenue] was around $35 million, and 2010 was around $10 million. So the company’s gone from $10 million to $75 million in two years in terms of revenue,” he said.

Combining AOL’s owned and operated content, (StyleList, TechCrunch, etc.—which Cakmak noted are category leaders), with the technology platform that has developed over the years, and this seems to have the makings of a potential win for AOL.