AOL Chases $32 Billion Market With Automated Ad System

AOL Inc. (AOL), pushing an expansion beyond Web publishing, introduced a system that helps companies automate the process of buying and selling online advertising.

The service lets publishers sell space on websites and digital videos using software. Programmatic advertising, as it’s known, is expected to grow to $32 billion in worldwide sales by 2017 from $12 billion last year, according to the latest estimates from Magna Global, the research division of media-buying firm IPG Mediabrands.

That projected growth is why AOL plans to stake a bigger part of its future on such ad services, Chief Executive Officer Tim Armstrong said. The move represents a switch in focus from original content -- favored by the CEO when he first came on board as head of AOL in 2009 -- to ad technology.

“This will definitely be the fastest-growing part of our business going forward,” Armstrong said in an interview. That’s because AOL will be able to reach a much wider audience with ad services than with its own content, he said.

AOL, based in New York, is proposing a new kind of service with its software and proposes to work with other ad networks and exchanges. Even so, it’s in a market filled with formidable competitors, including Google Inc.’s DoubleClick ad exchange, Yahoo! Inc.’s Right Media and newer entrants such as closely held AppNexus Inc.

More Flexibility

AOL already offers automated ad buying through its own network that includes its properties, like the Huffington Post, and content partners, including Politico and the Guardian. The new service will have much more flexibility, and potential clients will be able to create their own ad network within AOL’s system, Armstrong said.

The system includes a bidding platform and the automation of purchase orders, simplifying a paper-bound process that advertisers, publishers and TV networks have used for decades.

“Agencies are still sometimes using fax machines,” Armstrong said.

AOL’s biggest gains have come from its programmatic ad division, which reached $223.6 million in sales in the fourth quarter, a 63 percent increase over the previous year. AOL’s content group only gained 4 percent to $283.4 million.

Armstrong signaled his shift in strategy with the $405 million acquisition last August of video-advertising startup Adap.tv, the largest deal under his tenure. Adap.tv gave AOL a large allotment of digital video inventory, helping it offer a compelling programmatic service to ad agencies, the CEO said in the interview.

“Unrecognized Value”

AOL shares climbed 3.7 percent to $43.83 at the close in New York, the most since Feb. 4, after Jefferies LLC said the company’s network segment is underappreciated by investors.

“We see unrecognized value in high growth programmatic assets with the AOL Network business” in the range of $80 or more per share, Brian Pitz, an equity analyst with a buy rating on the stock, wrote in a report. “AOL has stitched together a powerful set of assets to build out ‘the pipes’ for high quality content and ad distribution.”

AOL is considering charging a regular licensing fee plus commissions on the volume of advertising sold, according to Bob Lord, CEO of AOL’s ad platforms division.

Media buying agency IPG Mediabrands has signed on as a charter member of AOL’s new service. CEO Matt Seiler said he expects his agency to deliver half of all its North American ad sales through automated processes by 2016.

“Media owners are spending an inordinate amount of time with outdated ways of doing orders,” Seiler said over the phone. His firm is one of the biggest media-buying agencies, managing over $37 billion a year in ad purchases. “This gives us a chance to focus more on creative side of serving clients.”

Commercial Spots

Armstrong and his rivals are banking on automated ad buying to start taking over the market for premium ad placements -- for example, a front-page slot on the Huffington Post. Publishers have traditionally used in-house staff for that inventory, while programmatic systems have handled the leftovers, what’s sometimes called the “remnant market.”

AOL’s new programmatic system will also include sales of TV commercial spots, which could represent a boon to digital-media ad buyers. For the moment, the small screen still commands the most marketing dollars, with advertisers planning to spend almost 60 percent more on television than on digital media this year, according to ZenithOptimedia, a research unit of Publicis Groupe SA. Internet ads in the U.S. are projected to reach $43 billion, with TV advertising garnering $66.8 billion.

To contact the reporter on this story: Edmund Lee in New York at elee310@bloomberg.net

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net; Anne Reifenberg at areifenberg@bloomberg.net

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