Gotta love it when two companies within your portfolio decide to cooperate in a win-win deal with each other. Yesterday, two of the largest holdings in this portfolio -- AOL Time Warner (NYSE: AOL) and eBay (Nasdaq: EBAY) -- announced that they were extending and expanding their successful marketing partnership.
The deal finds eBay paying an undisclosed sum to continue marketing its service to AOL's 33 million-plus online subscribers. What is different about the new deal is that eBay will also be advertised across AOL Time Warner's entire media empire, not just online. That means we can soon expect to see eBay ads in places such as AOL's CNN and Time Magazine.
In addition, AOL will continue to represent eBay as the company's exclusive third-party advertising agency. Basically, AOL's sales agents will continue to also work on behalf of eBay.
A win-win deal
The deal seems like a good one for both parties involved. For eBay, the company's marketing dollars will go much further and reach numerous different medias that were essentially untapped for the company. Online ads alone were once an effective way for eBay to market since its service was only a click away, but the company needs to expand its reach in order to maintain growth.
This is because most of the "low-hanging fruits" (aka, heavy Internet users) already know about eBay and what the company's services can provide, and online ads are targeted largely at this group. To get more members of the mainstream using eBay beyond the reported 34 million registered users it has, the company has to go to where the mainstream is, which means television and magazines.
When eBay struck the first advertising deal with AOL back in 1999 (about a month after this portfolio first bought the shares), eBay was but a babe with trailing 12-month revenue of well under $100 million, and the deal cost the company $75 million -- no small sum at the time. Today, eBay is easily pulling in revenue of nearly $200 million a quarter, and even a marketing budget twice the size of the previous one would barely affect the company.
Though the terms of the extended relationship weren't released, eBay did say that the renewed partnership would not have a meaningful impact on the company's financial projections and the profit guidance it has given Wall Street. This is a good sign that eBay doesn't have to empty out the piggy bank to get the marketing it needs to maintain its edge and keep growing.
If you can't beat 'em, join 'em
The move of joining with eBay also seems to be a smart one for AOL. Unlike most of the major portals, AOL never tried its hand at the online auction market, effectively yielding the lucrative market to the company that clearly, even as far back as 1998, had the dominant position. AOL, in turn, has not been forced to write off a failed attempt at conquering the auction market, but has rather been left to harvest the marketing fruit eBay has thrown the company's way.
AOL stands in stark contrast to many of its peers on this front. Microsoft (Nasdaq: MSFT) also tried to get a competing auction service up and running but also eventually waved the white flag and joined eBay. Yahoo! (Nasdaq: YHOO) and Amazon (Nasdaq: AMZN) still are competitors to eBay, but neither can hold a candle to the company clearly dominating its niche.
Showing AOL Time Warner's strengths
With the marriage of AOL and the traditional media businesses of Time Warner, most (including yours truly) have been focusing on the operating synergies of the merged business as well as the company's positioning to take advantage of the convergence of traditional media with the Internet. However, this renewed eBay partnership also shows another of AOL Time Warner's strengths.
Namely, the company can act as a "one-stop shop" for advertisers looking to run a new marketing campaign. AOL Time Warner can now offer extensive advertising using the Internet, cable television, and print media. Whatever media advertisers prefer, even if this includes a "shotgun approach" with just about all media types (the approach eBay is now going with), AOL Time Warner can serve the need.
Furthermore, AOL Time Warner has managed to snag a cash-rich Internet company when such beasts are becoming increasingly rare. AOL was one of the primary beneficiaries of the late 90's dot-com IPO gravy train when numerous upstart Internet companies blew their budget advertising online with AOL. Today's environment is drastically different, and it's good to see at least one of the marketing partnerships survive and thrive.
We still love both companies
There's one thing for certain -- we won't be unloading AOL Time Warner or eBay any time soon. Though AOL Time Warner is a drastically different and larger company than even just a year ago, the media behemoth is still a favorite.
There is also good reason why we bought additional shares of eBay last March -- a trade that is now up nearly 50% in less than six months and that also brought the overall average cost down. The factors that led to the buy in March, as well as the initial purchase in early 1999, still apply as much as they ever did. As eBay continues to grow, the company's position gets even better, and the positive cash flow is really starting to ratchet up.
In fact, the company generated more free cash flow last quarter ($51 million) than it had in total trailing annual revenue when we first bought the stock ($47 million). If that's not a solid sign of just how well the company is growing and executing, I don't know what is.
To close, we give enthusiastic thumbs up to the renewed and expanded partnership between two of our largest Rule Breakers. The deal should allow both companies to continue to create value for both their customers and their shareholders. Forget stories of dot bombs... these companies are dominators.
Paul Larson has been an AOL subscriber since 1993 when he got a free sign-up disk in the mail. (Some marketing tactics never change.) Paul does not currently own AOL, but he does own eBay. You can see Paul's other stock holdings online. The Motley Fool has a progressive disclosure policy.
