Three Internet Content Creators Changing With The Times

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the Internet has matured, new business models have replaced unsuccessful ones. Today, companies like AOL (NYSE: AOL), IAC Interactive (NASDAQ: IACI), and Demand Media (NYSE: DMD) are using ad supported content and subscription services to build lasting businesses.

The Walled Garden

AOL, before its merger with and subsequent separation from Time Warner, was the leading dial up Internet access company. When the Internet was in its infancy, AOL made getting online easy, providing everything you needed in just one place.

However, that quickly turned out to be too limiting as others were providing faster and cheaper services without the content overlay. AOL's model quickly broke down. By that point, however, it had orchestrated the purchase of Time Warner, arguably one of the worst mergers in decades. Once Time Warner managers had regained control of the ship, they jettisoned the floundering AOL unit as quickly as they could.

Doing it Alone

On its own, AOL has seen revenues decline every year. That said, the top line appears to have stabilized around $2.2 billion. About $1.4 billion of that is made up of advertising revenues. The company has basically gone from an Internet service provider with content features to an ad supported web publishing company. AOL owns such notable brands as Huffington Post, TechCrunch, Engadget, MapQuest, and Moviefone. That's a solid lineup.

The shift to the new model, however, hasn't been smooth. For example, in 2008 the company's advertising revenues and subscription revenues were essentially equal to each other at around $2 billion each. Advertising fell to $1.2 billion before starting to pick up again. Subscriptions, meanwhile, have fallen steadily and now account for just $700 million of the top line.

A patent sale in 2012 makes the company's earnings virtually meaningless for that year. However, the company earned $0.34 a share in the first quarter, a good sign that its business is capable of sustaining itself. That said, the shares are trading near recent highs so they are most appropriate for aggressive investors. It will be important to monitor the interplay between declines in subscription revenue and continued growth in advertising income.

Out of the Travel Market

IAC Interactive is another Internet company that has gone through some notable changes, jettisoning several businesses, including its travel assets, just before the 2007 to 2009 recession. That was an inauspicious time to do anything, especially to start relying more heavily on advertising. The top line fell between 2008 and 2009 before picking back up in 2010. It's grown each year since.

The company owns second tier search networks like Ask, dating sites like Match.com, and a varied collection of entertainment and information websites. Some of its sites, notably the dating sites, are subscription based, but most use free content to sell advertising. IAC's two strengths are buying older web properties and reinventing them, and buying new and smaller web sites and leveraging its portfolio of sites to boost traffic and advertising revenue.

Perhaps most impressive is IAC's efforts to reward shareholders with dividends. The company initiated a dividend in 2011 and doubled in 2012. The shares yield around 2%. Growth and income investors should take a close look at this Internet content company. It earned over $0.60 a share in the first quarter—more than enough to pay the dividend and grow its business.

An Upstart

A company with less history that is changing its stripes is Demand Media. The company started out selling advertising around low quality articles that it created to rank highly in web searches. Google specifically changed its search algorithms to weed out such weak content. That sent the company back to the drawing board.

It has since been working to upgrade its content and branch into new areas, like subscription services. For example, it offers dieting subscription services at its health focused Live Strong site. It also purchased Creativebug, a subscription service for craft hobbyists.

Annual revenues have been growing at the company and it turned its first profit in 2012. That said, after six quarters of top line growth, revenues fell sequentially in the first quarter. Earnings, meanwhile, dropped to a penny a share from six cents in the fourth quarter. That's not a good sign.

However, it recently announced plans to buy Society6, a move that brings Demand Media into the niche retail space. That creates a new revenue source that could be leveraged throughout the company's brands. The company's shares fell 20% on the deal. Aggressive investors who think Society6 could be the catalyst needed to push revenues higher will see this an opportunistic time to buy.

Evolving

The Internet is a constantly evolving medium. AOL, IAC, and Demand Media have each shifted away from their original models. As the Internet has turned into an entertainment medium, however, each appears to be positioning itself for growth. IAC appears to be the best positioned of the trio above, though AOL looks to be on increasingly solid footing. Demand Media, meanwhile, is only just starting to figure out a model after its first focus floundered. But that could mean notable upside if its second act resonates with customers.

Tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure