Tim Armstrong’s biggest purchase might be his savviest yet.
In an earnings call Wednesday, the CEO announced that AOL is betting a whopping $405 million on a web video company called Adap.tv, which ranked No. 32 on the 2012 Inc. 500 list of fastest growing companies.
For those not keeping score, online video is one of the fastest growing advertising markets, and Adap.tv, with its robust video advertising platform, was among a handful of similar companies that had yet to go public. AOL--which has 54 million unique monthly visitors and came in No. 3 in comScore’s most recent ranking of the top U.S. online video content properties (behind Google and Facebook)--stands to profit greatly from the deal, as video has quietly become its cornerstone.
“They’re the best growth story, and they’re growing at triple-digit rates,” says Jeffries analyst Brian Pitz of AOL’s foray into video, which started with its acquisition of video syndicator 5Min in 2010. “For the past two years, they’ve been one of our most bullish names," adds Pitz. "The street hasn’t focused on it because of the brand…but [the deal] only bolsters their already-strong video presence.”
AOL, whose shares rose 2 percent today, is following the money. “Advertising, for the past 100 years, has been bought in bulk,” Armstrong said in a CNBC interview with Andrew Ross Sorkin. “We believe the future is going to be bought more like e-commerce and you’re able to plan, target, and do data analytics.” To that end, Adap.tv, which started in Israel, has plenty to offer.
Adap.tv is the "largest player" in the space, said Armstrong. According to Pitz, it may be the best fit for the brand. Though many questioned why AOL wouldn’t go for VEVO or Hulu, Adap.tv makes sense, says Pitz, because it does not sell media on behalf of publishers, but rather takes a cut of all transactions made on its advertising platform.
AOL’s press release noted that Adap.tv is “one of the fastest growing platforms on the Internet, with global revenue growth in excess of 100 percent per year in each of the last three years.” The company also boasts “wide adoption by the largest global advertisers and publishers,” according to the release, “including 83 out of the Ad Age 100 and 70 of the comScore 100.”
Beyond glowing stats, there is the plain and simple fact that knowing what consumers want to buy, and when they want it, is the future of marketing. As Clark Fredricksen, vice president of eMarketer, explains, programmatic ad buying, which Adap.tv excels at, is an “automated selling of ads based on cookies and user behavior.”
Let’s say you visit New Balance’s site to look for a pair of sneakers. If you check out two pairs, decide not to buy them, and then head over to Facebook, the social network will display an ad for the shoes you previously viewed. “That’s an incredible level of relevance to you compared to an ad that’s catering to a broad demographic,” Fredricksen says.
Before AOL came knocking, there were rumors that Adap.tv was preparing to go public in July. But Wall Street hasn't been exactly enamored with the industry. A video ad company, Tremor, went public in June to little fanfare. YuMe, another video ad company, went public today with a lackluster IPO. So did Adap.tv take the easy way out? Probably not, says Fredricksen. It's more likely that AOL spotted a bargain.
"Adap.tv probably wanted a bigger number [at first]," he speculates. "That the other IPOs were less successful probably gave AOL a push to get it cheaper while they could."