Power Play: AOL Acquires Advertising.com
The purchase of Advertising.com is AOL's first major acquisition since the dot-com bust of 2000. According to the company, the deal increases AOL's ad audience to 140 million uniques per month. Advertising.com will also offer AOL new ad technologies, including behavioral targeting and online video commercials. AOL has traditionally focused on search and cost per thousand-based (CPM) transactions, and has had difficulty accepting rich media formats. As properties on its network segue to HTML and it brings more broadband programming to market, AOL will use Advertising.com to deliver and target an array of rich media and broadband video ads.
In recent years, the Dulles, Va.-based company has struggled with advertising sales. Ad revenue fell 40 percent in 2003 and 5 percent year-over-year in the first quarter due to economic conditions in the ad market, and the ongoing burn-off of so-called "backlog" multi-year ad deals.
In a conference call with the media and Wall Street analysts on Thursday, AOL Chairman Jonathan Miller said that the acquisition of Advertising.com, coupled with the resurgence of the online advertising industry and the demand for targeting technologies will aid the company's turnaround. He added that Advertising.com will continue to operate as a stand-alone entity much like Yahoo! and its search services provider Overture.
Advertising.com mainly buys CPM inventory from Web publishers, search engines, and email publishers, and resells that inventory on a cost-per-acquisition or pay-for-performance basis. It works with nearly 800 advertisers and 1,500 publishers. Its network reaches 110 million people each month, or 70 percent of the U.S. Internet population, which makes it the largest third-party advertising network on the Internet, according to comScore MediaMetrix.
Advertising.com CEO Scott Ferber noted that the company had filed for an initial public offering, but decided to pursue an acquisition after it was approached by AOL. "Now we will become bigger, faster," Ferber said.
Wall Street analysts seem to agree that the acquisition is a good move for AOL. "We believe it sends a very important signal regarding [Time Warner's] willingness to invest in the AOL business, especially the high growth/high margin advertising segment, Merrill Lynch first vice president Jessica Reif Cohen said in a report. "We applaud the decision to invest in this strategic/advertising-based business, and believe investors will embrace this as a means to unlock value from the AOL segment."
In his report, CIBC World Markets CFA Michael Gallant said: "This is a smart acquisition, in our view, as it moves AOL deeper into the pay-for-performance area of visual online advertising--the fastest growing area of online advertising besides paid search." Gallant also added that the price, which might seem high, was "reasonable, in our view, given that Advertising.com is the leading company in a burgeoning growth area in pay-for-performance-based deals in visual advertising."
In 2003, Advertising.com's revenue was 132 million, an increase of 80 percent over the previous year.
CEO Scott Ferber noted that Advertising.com typically competes with ValueClick and 24/7 Real Media. He said that Advertising.com is more focused on cost-per-acquisition than its competitors. However, 24/7 and ValueClick each aggregate publishers' web inventory and sell it to advertisers, like Advertising.com.
David Yovanno, general manager of ValueClick's U.S. Media Division, noted that there are several similarities between the AOL-Advertising.com deal and Yahoo!'s acquisition of Overture in 2003. Overture had lucrative partnerships with competitor MSN after its purchase, and while it maintained a partnership with MSN after the Yahoo! acquisition, the deal unraveled over time. According to Yovanno, Advertising.com finds itself in a similar situation, as it has outstanding deals with MSN and Yahoo!, which could have an adverse impact on the company's revenue.
Yovanno noted that his other concern with the deal is the fact that it is entirely cash-based, which leaves little incentive for Advertising.com executives to stay with the company after the acquisition is finalized.