AOL Is Finally Ready to Focus on What Matters

Getting rid of Patch was the right move for AOL, as now the company can focus on the proven revenue generator it already has.

Jan 22, 2014 at 2:57PM

The local news business Patch has long been considered an albatross by shareholders of AOL (NYSE:AOL), and CEO Tim Armstrong finally caved to pressure and sold a majority stake in the company to Hale Global. While Armstrong wasn't able to quite get rid of the overall business and AOL retained a minority position in the company, investors liked the move regardless and bid up the share price of the stock in response. Over the longer term it should be a nice catalyst, as AOL has spent upwards of $300 million in an attempt to make the hyper-local news business profitable.

The local advertising business
This isn't to say that attempting to find a way to tap into the huge local advertising market is a bad idea. Local advertising is projected to generate about $107 billion in revenue in the United States, according to researcher Borrell Associates. On the digital side, Borrell said local ad spend should jump to about $34 billion.

The challenge, as Armstrong and AOL found out, is the cost of building out local content to attract ad revenue. For example, in 2013 the company averaged about $78,000 in sales for each local site, but at a cost of $140,000 to $180,000 each.
In light of those numbers, it's easy to see why pressure mounted for AOL to get out of the business.

AOL's major strength
Shareholders like this move because it forces AOL and Armstrong to focus on what has been working very well for them and what should propel the company to a profitable future: digital video ad revenue.

In that promising area, AOL continues to be the market leader. Digital ad views came in at 4.3 billion for December, easily beating out the 3.6 billion views for Google's (NASDAQ:GOOGL) Google Sites. Of the overall U.S. population, AOL reaches 52% of it via its video ads.

Of all digital ads, video commands the biggest revenue and marketers are willing to pay top dollar for digital video ad views. This is the future for the industry, and AOL must focus solely on that area if it wants to be successful.

Be aware that when talking about video ads, it's referring to streaming video advertising. It doesn't include other means of monetization like branded players, matching banner ads, or overlays. These generate revenue, but not at the level that streaming video ads do.

Google video ads
Google  continues to lead the digital space in overall video viewers, with 159 million unique viewers. Next is Facebook (NASDAQ:FB) with 79 million uniqiqe viewers, followed by AOL, which is in third with 76 million unique video viewers.

The majority of Google video views come from YouTube, which still primarily streams user-generated video views that aren't as attractive to advertisers. For those willing to place ads against user-generated videos, they don't attract as much revenue as ads placed against premium video content.

This is why Google continues to focus on premium video channels in order to draw more revenue from the views. AOL has more premium video content, which is why it enjoys more video ad views.

As for Facebook, it has soared into second place in overall video views, but that is based upon the significant increase in short-form Vine videos on the site. Each of these videos lasts about 6 seconds. Vine is used primarily by teens and young adults to put together little video snippets to share with friends, and is unlikely to attract much revene in its current format.

While it's understandable why AOL Chief Executive Tim Armstrong wanted to give Patch a try to generate revenue from the over $100 billion in local ad spending, it's a sector that no one has figured out how to make profitable. Until and if that happens, local advertising will remain a dream rather than reality as far as becoming a business that can be scaled across the United States.

Right now, companies like AOL, Google, and Facebook need to focus on the digital video ad space. That is where the major demand is for marketers, and that is the place that they're more than willing to pay for.

Allowing Patch to be placed under the management of another company was a good move. Shareholders and investors approve of it, and now AOL should focus primarily on building up its premium video content to boost its revenue.

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Gary Bourgeault has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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.

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