AOL bets on programmatic ads, pulls back on Patch

The Internet media company purchases advertising platform Adap.TV and reveals plans to curtail local news sites operations.

By Forbes Digital Aug 7, 2013 12:05PM

Dollar sign on keyboard © CorbisBy Jeff Bercovici

Here's a sign that Tim Armstrong feels he's regained control of the narrative at AOL (AOL): He's back in the market for big-ticket items.

AOL's $405 million purchase of the video advertising platform Adap.TV is the biggest acquisition of Armstrong's four-year tenure as CEO of the Internet conglomerate, bigger even than his $315 million grab of The Huffington Post. In fact, not counting AOL's own spin-off from Time Warner (TWX) in 2009, the deal -- which consisted of $322 million in cash and the remainder in stock -- is the company's largest since it bought the social network Bebo for $815 million in 2008.

It's a lot of money to spend, but Armstrong has been diligently preparing his investors for this moment. For several quarters running, he's been using part of the time on AOL's earnings calls to describe his vision of a digital advertising marketplace that's increasingly shaped like a barbell, with one weight consisting of software-driven programmatic ad deals and the other of human-centric, high-touch marketing services.

As a platform for buying and serving programmatic video ads, Adap.TV is positioned to play a big role in what Armstrong, on Wednesday morning's second-quarter earnings call, described as "a decade-long shift that will move tens of billions of dollars from television advertising to IP-delivered web video advertising."

Armstrong is hoping to accelerate that shift by hosting an annual "upfront" event where, for the first time, advertisers will be able to lock in programmatic deals on an advance basis, as they do with television ads. At a recent dinner to preview the upfront, which will take place Sept. 23, Armstrong predicted that massive consolidation in the insanely complex display advertising landscape will promote further growth in programmatic by making advertisers' dollars more efficient.

The other big news from the call centered on Patch, which has also been a regular topic on earnings calls, albeit not by Armstrong's choosing. Armstrong finally revealed how he plans to keep his promise to make the network of local news websites profitable by the end of 2013: by closing, selling or finding partners for the 300 or so Patch sites that, in the company's estimation, aren't on a course to break even anytime soon.

He suggested that AOL may be able to find willing partners for many of the sites in the numerous struggling metropolitan daily newspapers that have been unable to invest as much as they'd like in their own digital and local operations.

Armstrong didn't say exactly what Patch's revenues or costs would look like after disposing of the bottom third, but, in response to an analyst's question, he did say that the average cost of a Patch site is "much, much lower" than the $150,000 it peaked at two years ago.

AOL's revenue for the quarter was $541.3 million, up 2% from last year.

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