How much of a revenue boost could AOL’s advertising business get from the new “Tacoda-enhanced network strategy”? (TENS, as we’ll affectionately call it.) We still have limited data, but here’s our best guess: about 10%-40% (with a bit more than half of that flowing through to EBITDA). For beleaguered AOL watchers, owners, and employees, this is good news.
TENS, you may recall from some breathless management presentations, is a new strategy whereby AOL will:
- Focus more intently on selling display ad inventory on third-party properties, AND
- Improve the value of that inventory and its own inventory by applying behavioural targeting (Tacoda) to industry-leading scale (Advertising.com).
We will leave aside for now the question of whether this strategy will succeed (a different but obviously crucial question). We will merely explore what might happen to AOL’s performance if it does.
To perform this analysis, we need to make three assumptions:
The revenue AOL currently generates from its network and its own low-value inventory. As shown on the attached spreadsheet, AOL generates about 25% of its ad revenue from its network, and another 40% from display ads on its own properties. We estimate that 50% of the network revenue and about 25% of AOL display revenue might be “enhanceable” through the new strategy–or about 40% of AOL’s current ad revenue.
How much of a price boost AOL might get from “Tacoda-enhancing” this inventory. Our research into Tacoda suggests that Tacoda has been able to take generic non-premium inventory (news, weather, email, etc.) that typically yields a $0.50-$1.00 CPM and turn about half of this into inventory that yields about $3.00 (for a net yield boost of 150%-300%). This compares to standard performance optimization techniques–a la Valueclick, Blue Lithium, Tribal Fusion, etc.–which can typically jack yields to about $0.80-$2.00. (If anyone wants to question/refine these numbers, please do).
In AOL’s case, we have assumed that 25% of display inventory and 50% network inventory can be “enhanced” (and 0% of paid search) and that the “enhancement” might range from 50%-150%. This is less of a boost than Tacoda has seen in the past, but we take the discount for two reasons. First, we imagine AOL is already doing everything it can to wring yield out of that inventory. Second, we feel the need to take an “AOL discount.”
How much of this increase AOL will capture in EBITDA (vs. passing on to the property owners). AOL will get to keep most of the value increase on its own properties. Unfortunately, it will have to pass most of the network increase on to third party sites. The increase in EBITDA from the new strategy, therefore, will be significantly less than the increase in revenue.
As the attached spreadsheet shows, we believe that the TENS strategy, if successful, might be able to boost AOL’s run-rate ad revenue by about 10%-40%–or from a run-rate about $2 billion a year to one of about $2.2-$2.8 billion.
See Also: AOL Mid-Quarter Update