AOL’s (TWX) Ad Network Strategy Explained


An AOL executive gave us some colour on the company’s new “network strategy,” which we described earlier in conjunction with the company’s announced move to New York   Without detailed data on revenue, profitability, and unit-economics (some of which may be forthcoming over the next few weeks), it’s hard to translate this into precise financial implications.  But theoretically, at least, the strategy makes sense.  The goal is to achieve such a humongous reach that it is possible to drive the value of even “remnant” inventory up.  Details...

See also: How Many People Will AOL Need to Fire?

As described earlier, AOL’s “network” strategy will combine the strength of (the leading third-party network), Tacoda (leading behavioural network), Third Screen Media (mobile), Lightningcast (TV), ADTECH (ad serving), and other third-party ad services to sell advertising on other publishers’ properties.  Our caution here has been that all ad revenue is not equal: AOL and other portal operators keep far more of ad dollars spent on their own properties than on third-party properties whose ads they serve and/or sell.  (This relationship is similar to that between Google’s paid-search and content network businesses).

The company’s goal in pursuing a network strategy, however, is not to sell the AOL properties down the river and settle for lower ad-selling margins (although if the AOL properties were growing strongly, the network business would presumably not have such front-burner focus).  Rather, the goal is to take a page out of Google’s book: To amass such a volume of advertiser interest and inventory (across both owned/operated and third-party properties) that it is possible to charge higher prices for all the inventory on the network.

One reason for Google’s 2x advantage over Yahoo in revenue-per-search, the common wisdom goes, is that Google is benefiting from a network effect: Of the major search engines, only Google has enough inventory to reach the target audience repeatedly, so all the advertisers want to be there.  All the advertisers then bid against each other for this inventory, and, in doing so, drive up the average prices.

AOL wants to do in display advertising what Google has done in search: amass the largest amount of owned/operated and third-party inventory in the world and then monetise it using a suite of technology products.  In this effort, it has a major head start: reportedly has 4x-5x the inventory share of its nearest competitor, and our source estimates that you could add up all the inventory of the next 25 players and still not equal an (anyone care to verify/protest?)