AOL and parent Time Warner (TWX) have been in the news quite a bit lately. Time Warner today reported it is spinning off its cable unit and will receive a $9.25B dividend in return.
So the ongoing transformation of the company continues.
With the ebb and flow of Microsoft/Yahoo! deal rumors Time Warner's AOL unit has occasionally popped up as a potential player. With AOL, their transformation has been a public and often-criticized drama that seems to go on without end.
This might be a good time to see what progress AOL has made.
AOL is pursuing a three-pronged strategy. They are working to extend and capitalize on their most popular products, properties and features. They are looking to profit from the long tail. They are committed to creating a formidable ad network. Let's look at each in turn.
Product extension --
AOL has recently closed the purchase of Bebo, the British social network. Bebo has more than 40 million members worldwide. In the United States, however, it ranks a distant third behind MySpace and Facebook.
Here's why this is significant for AOL:
Bebo will form the centerpiece of AOL's newly created People Networks business unit. People Networks will integrate AOL's other community applications and tools, including instant messaging, chat and e-mail into Bebo. Users will be able to merge AIM and Bebo profiles so they can use common screen names without re-registering. In addition, People Networks will integrate other recent AOL acquisitions, including widget technology company Goowy Media and social search question and answer
Here's why it may not be all it's cracked up to be:
It is becoming common knowledge that it is hard to monetize social networks. The merging of profiles provides at least an improved advertising potential for AOL. The hope is that AOL will be able to monetize this audience in ways that other social networks haven't. Even if they can pull it off, the modest audience size in the U.S. may make it hard for AOL to see the benefits they are seeking.
Despite the caveats, the acquisition does make sense. Bringing Bebo in-house and integrating all of AOL's community tools into it does provide AOL with a more complete social networking platform. With all the kids who are using AIM and ICQ, AOL can make a play at early acquisition. By providing the one-profile approach, it is easy to become a Bebo user as a side activity to using AIM or email.
Profit from the long tail --
AOL has said it will focus on serving niche audiences with the launch of dozens of specialty web sites.
Why this is a good idea:
AOL is attempting to do a better job of attracting advertising revenue to offset its rapidly declining Internet access business. The company is hoping that by providing a more targeted experience for users, more accurately targeted ads can be served. As a result of more accurately targeted ads, there should be higher click-through rates. That means ad rates can be raised and AOL's revenue will climb.
This approach is an effort to begin building web ad inventory that is separate from the AOL portal. The knock against portals is that they are too general in their content and therefore, it is harder to ensure marketers are reaching the customers they are looking for. By moving down the "long tail" and capitalizing on many users in numerous smaller, more defined groups, AOL expects to actually increase the total size of their audience, even as it fragments that audience.
Ironically, it is the AOL portal, with its millions of daily visitors, that provides the launch pad for all the niche sites that AOL intends to create.
Why this is harder than it looks:
AOL refers to the niche sites as "passion points" but the success or failure of the niche sites may indeed depend on the passion of those in charge of generating content. If the niche sites have a corporate feel, lack a strong point of view and fail to provide a compelling reason to users to visit and return, AOL may end up just squandering capital and distracting management by going in too many directions.
There are some early signs of success. According to traffic measurements by comScore Inc., AOL has had seven consecutive months of year-over-year growth in both unique visitors and page views. For the entire first quarter, page views for AOL's content-focused sites, which exclude e-mail, instant messaging and the general AOL.com portal, grew 22 percent to 9.5 billion compared with the same period in 2007. The content sites had 55 million visitors in April, up 12 percent.
The traffic growth, however, hasn't translated to ad dollars, which were flat in the first quarter.
Ad Network Expansion --
"Platform-A is AOL's way of turning itself inside-out, and refocusing on serving ads outside of AOL across the Web." AOL has taken the opportunity to focus on serving ads for any advertiser on any web property. The company is not limiting itself to just serving pages of its own content.
Why this is a good idea:
According to ComScore, AOL's Platform-A is the leading online advertising network, reaching 167 million unique visitors in February and edging out Yahoo! by 5% and Google by 10%.
AOL has built Platform-A by acquiring a series of advertising companies such as Advertising.com, Tacoda, Quigo and Third Screen Media at a cost of about $1 billion.
AOL Chairman and CEO Randy Falco says that at this price, Platform-A was a bargain compared with Microsoft's $6.1 billion purchase of aQuantive and Google's $3.1 billion acquisition of DoubleClick, about 10 times DoubleClick's revenues. According to TechCrunch, that would give Platform-A a top-end valuation of around $20 billion, which is what all of AOL was valued at when Google took its 5% stake.
Why this is harder than it looks:
AOL has made mistakes integrating all these acquisitions into a single "Platform-A" advertising unit. Its sales forces weren't aligned, and in some cases they were undercutting one another on prices. Early results, accordingly, were mixed. Non-search ads on AOL sites declined 18 percent compared with the same period in 2007 and ad dollars were flat in the first quarter. Yet, Platform-A saw big growth in ads that AOL brokers for third-party sites. You guessed it: these are the sites vying for the same eyeballs as AOL's new niche sites.
The re-invention of AOL continues. The most conspicuous success is Platform-A but even the new expanded network of web sites including the AOL portal and all the niche sites are showing growth. Management has at least committed to experimenting and trying new things (Bebo, for example) and inevitably some of the things will work and some won't. In the meantime, the Internet access business continues to wither away and AOL is pushing hard to be one of the top players in the ad network space.
It seems that AOL is at least being somewhat conservative in how much they are paying for some of these moves. Platform-A was put together without breaking the bank. Bebo's price seems too high to me but then the company could have gotten really carried away during the some of the recent mania for social networking sites and paid a lot more. The niche sites AOL is creating may not be terribly expensive as each is quite focused and has many characteristics of blogs. Blogs tend to not be that expensive to set up and run so the incremental cost will revolve around the acquisition of talent to create content.
So AOL is working to attack the dual problems of sagging revenues and becoming an Internet has-been. They are seeing traffic improve and that is an important first step. If they can just start to monetize more of that traffic and see some of the revenue numbers start to improve, that would be the confirmation investors need to accord the AOL unit a higher valuation. And that would certainly benefit parent Time Warner and its stock price.
Disclosure: at time of writing author is long TWX
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