AOL, Inc. Bets on Personalization Over Socialization

Here's what AOL's management has to say about its latest acquisitions.

Feb 10, 2014 at 1:00PM

AOL (NYSE:AOL) delivered its fourth-quarter results last week, handily beating analysts revenue estimates. CEO Tim Armstrong summarized the company's performance in 2013 thusly, "In 2013, AOL delivered what we told you we would deliver."

Indeed, it was a good year for the company. After its acquisition of Adap.tv in the third quarter, the company leapt over Google (NASDAQ:GOOGL) to become the No. 1 video ad displayer. The company's latest acquisition, Gravity, will help AOL further personalize its content for each unique viewer. Instead of relying on social data, like Facebook (NASDAQ:FB), AOL sees more value in personal data and believes Gravity will help grow traffic and ad revenue in 2014.

Here are some key quotes about AOL's potential in 2014 from the company's fourth-quarter earnings call:

The Gravity of the situation
There were a lot of questions on the call about the sort of opportunity the Gravity team presents for AOL. Tim Armstrong did not downplay his opinion of the personalization platform one bit. "We believe that Gravity is the next developing graph on the Internet."

In contrast to Facebook's social graph, which takes the opinions and interests of your friends and connections in your social network, Gravity reverses the structure. It focuses on things that you are interested in -- things you would share on a social network.

Armstrong later elaborated on how Gravity will improve AOL's revenue in 2014:

One side of the money equation is serving consumers better content more often which leads to traffic growth. Traffic growth leads to the ability to serve more impressions. Enhancing those impressions ... with data from Gravity allows us to potentially have a higher cost per ad overall. So there is a true network effect underneath Gravity.

That's not to say Facebook's social graph doesn't work well at improving ad targeting. Last quarter, Facebook increased its average ad price 92%. Interestingly, Facebook is still slightly behind AOL in average revenue per user, but if it continues growing ad prices anywhere near the rate it did last quarter, it won't be long until it overtakes AOL.

Adap.ting internationally
Management also sees opportunity in leveraging its current assets to expand Adap.tv internationally. Prior to the acquisition, Adap.tv had a very small presence internationally, and CFO Karen Dykstra believes the opportunity abroad is both "enormous" and "tremendous." "With the combination of Adap.tv, our assets that we already had internationally including AOL On and Be On and our Networks group, I think the opportunity is tremendous internationally."

AOL has a strong track record of expanding its acquisitions internationally. The Huffington Post, which it bought three years ago, was a U.S. only publication in 2011. Now, it spans five continents and will reach two-thirds of the world's GDP in 2014.

The company has the opportunity to integrate Gravity with the video ad exchange, as it takes on Google and YouTube internationally. Last quarter, Google derived 56% -- $8.8 billion -- of its Google segment revenue from international sites. Ad prices, however, are generally lower internationally than they are in the U.S.

But the digital video ad market is expanding rapidly, so AOL has an opportunity to capture that growth with Adap.tv and its web properties. Considering AOL was able to surpass Google in video advertising in the lucrative U.S. market, international expansion could lead to similar success.

Growing the network
AOL is poised for a very strong 2014 on the back of its latest acquisitions. The two purchases integrate very well with each other and the rest of the company. Gravity helps AOL increase page views, and Adap.tv improves its position in the rapidly expanding digital video ad market. Management has a clear plan for improving its company with these acquisitions and is not the least bit quiet about the opportunities they bring to the table.

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