Will This Company Turn Things Around?
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AOL (NYSE: AOL) has been in transition ever since the dot-com bust. Before then, they had one of the greatest monopolies of all time. If you were an early surfer of the Internet, chances were high you were an AOL dial-up subscriber. Chances were even higher you were hit with a busy signal on your first attempt. But that didn’t matter. At the time, AOL had an untouchable business model. They dominated Internet connectivity for mainstream users. Those glory days were over a decade ago, and the transition to today hasn’t been so enjoyable.
Looking ahead, we’re finally starting to see the light at the end of the tunnel. And where there’s light, there’s promise. AOL appears to be turning things around in a meaningful way. The time has come where AOL has accepted its place in today’s world and now can focus where it matters. It all hinges on monetizing its library of premium content through new channels. If they’re successful with this new initiative, it could become a new growth engine to their business.
Earlier this month, AOL announced a deal to distribute and monetize their entire library of over 20,000 original videos on Google’s (NASDAQ: GOOG) YouTube. At first glance, this development doesn’t sound very exciting, but that changes once you get into the details. It becomes increasingly clear how great of an opportunity this is for AOL.
Second only to Google, AOL serves the most videos on the Internet. ComScore estimated that AOL served 725 million videos to nearly 46 million unique visitors in August. This pales in comparison to Google, who served 13.8 billion videos. From a business perspective, it makes a whole lot of sense for AOL to distribute their videos on YouTube. In theory, delivering their content to a larger audience provides more opportunities to monetize.
The potential drawback I’m watching is if this approach will hurt AOL’s own properties. Will users stop consuming video on AOL’s sites because they can get everything on Google? Does this mean AOL will make less on each ad they serve because they now owe Google a cut?
Perhaps it won’t matter if the power of YouTube’s numbers works in AOL’s favor. If AOL can begin serving a higher volume of videos to a larger audience, it’d be viewed as a positive development for the company.
Assessing the Business
Before we continue thinking about AOL’s future, let’s gain some perspective by taking a look at how business fared last quarter. Here’s a breakdown of performance by division:
The total revenue decline of 2% was the lowest it’s been in seven years. The run rate on subscribers is the lowest it’s been in five years. That’s because revenue per user is up 2% and their simplified pricing tiers appears to be working.
The key takeaway is that AOL is primarily in the business of advertising, and that business is growing. That makes Yahoo! (NASDAQ: YHOO), Facebook (NASDAQ: FB), Microsoft (NASDAQ: MSFT), and Google their biggest competitors.
Aside from being bigger players in the search engine business, Yahoo! and Microsoft are the most similar to AOL. All three provide a user experience focused on professional content. The key difference between them and AOL is that they like to keep the majority of their flagship properties under their primary brand name.
Facebook, on the other hand, relies on user generated content to keep members engaged on their site. The more members are engaged, the more likely they’ll click on ads. Thus far, this approach has yet to validate that social media is the ultimate advertising goldmine. They have been struggling with ad click-through rates because members are failing to associate social media with anything other than entertainment. Essentially, their advertisements are irrelevant to members. Because of key differences between their business models, AOL and Facebook directly compete for an Internet user’s time.
AOL’s approach has been a bit different in the advertising world. It starts with delivering great content through their premium properties. To name eleven, they own About.me, DailyFinance, Engadget, Games.com, The Huffington Post, JoyStiq, Mapquest, Moviefone, StyleList, TechCrunch, and TUAW.
AOL remains relevant because they’ve either created or acquired great properties Selling ads on these sites is how their advertising division remains a viable business.
Another area of promise is how AOL is willing to deliver the same online video advertising model as television. They’ve partnered with Nielsen and are now offering viewership guarantees to advertisers. They’ve ensured an ad will be seen a defined number of times to a demographic of interest. This approach should raise rates on their ad network, and it could potentially persuade advertisers to shift their focus away from television spending.
They are one of the first major advertisers to adopt this approach. And sometimes being first is just what’s needed for investors to take notice.
AOL is transforming itself from a service provider into a premium advertising platform. It’s proven to be a more difficult and drawn out process than imagined. Still, management has demonstrated their ability to make great acquisitions that bolsters their premium content portfolio. As an added bonus, they aren’t afraid to shakeup the online advertising industry with innovative approaches that may improve their odds of success.
America loves a comeback story, and AOL might become the comeback of a lifetime. But before this can happen, their business needs to show further signs of improvement. Given their number two rank in online videos, their willingness to innovate, and their large portfolio of premium content, I’m cautiously optimistic AOL will turn things around.
Shares are up almost 140% year to date. This move has been mainly fueled by an earlier $1.056 billion patent deal with Microsoft, and it currently represents 31% of their market value. All things considered, I would initiate AOL as a hold with reasons to buy in the future as their business shows further signs of progress.
TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, Microsoft, and Yahoo!. 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.If you have questions about this post or the Fool’s blog network, click here for information.