Aol is making bold bets again. It announced this morning that it will purchase the Web’s #1 blog, The Huffington Post, for $315M in cash and stock, and make its founder, Arianna Huffington, the editor-in-chief over all its content properties. The deal comes on the heels of Aol’s acquisition of Michael Arrington’s popular TechCrunch blog, which became part of the Aol family last December. In adding The Huffington Post’s 25-30M monthly readers to its stable, Aol advances its audience strategy, but is still dependent on a number of elements coming together before it can return to the days of meaningful revenue and profit growth.
The underlying assumption of Aol’s strategy is that the online ad spending market will continue to ramp aggressively because while ~40% of media time is spent online, still only ~15% of U.S. ad spending is on digital media. This certainly seems to be playing out, as online advertising growth rates continue to hit double-digits, while overall ad spending is lumbering away at 1-4%.
Search is the leading format by far, but Google’s 76%+ share precludes all but the strongest of wills and deepest of pockets from participating. Microsoft’s takeover of Yahoo’s search business was an outlier. In November 2010, Ask.com announced that it would cease investing in its search business, and Aol outsourced its search business to Google years ago. Even the famously determined Jason Calacanis, the serial entrepreneur and founder of search upstart, Mahalo, recently determined that he would pivot his business away from search and towards video how-to content.
Under these circumstances, Aol has prudently chosen to focus its efforts on the display market, and in particular, online brand advertising, which at only 5-6% of the total brand advertising market — which itself is 165% larger than the direct response market – would seem to offer significant upside.
But there are reasons why brand spending lags in online media. One is fragmentation. Unlike in paid search, where most ad dollars flow through Google, display and brand advertising can be allocated across a dizzying array of portals and networks, each claiming unique reach and targeting capabilities. Another barrier is the uneven content quality that serves as the anchor for brand advertising. Advertisers know that their brands will be affected positively or negatively based on the quality of the content they’re associated with. The fear of a negative “halo” is why YouTube’s 100% advertising-supported model is just now turning a profit, even though it nearly controls the user-generated video space, with 117M unique monthly visitors, and counting. A third reason is that brand advertising, long the exclusive domain of broadcast TV and glossy print, have until now depended on the passive characteristics of those media to capture brief moments of consumer interest (and even then, is dependent on great creative to avoid being diluted by the thousands of marketing messages targeting us daily). But online is a traditionally more active medium that plays right into the sweet spot of direct response advertising in general, and paid search in particular. Establishing a brand connection with a consumer while she’s on a mission to check her Facebook page or to research where her favorite local band is playing on Saturday night, is immensely more challenging. So now let’s take a look at Aol’s approach and progress with regards to these issues:
- Fragmentation – this is where the recent acquisitions come in. Aol had already reported growing audiences, but with The Huffington Post, its overall reach in the U.S. will be about 117M UVs. Not a dominant position, but a meaningful number, to be sure.
- Content Quality –Aol recognizes that its content must be home grown and exclusive if it is to differentiate itself and offer a “safe” platform on which to invest in brand advertising. Its Patch (hyper-local content) and Seed (editorial platform) projects are an attempt at this, but neither has translated into revenue growth for the company as of yet. Of course, the story is still being written, and Aol hasn’t been shy about posting some pretty lofty goals – in a recently released strategy doc, dubbed “The AOL Way”, it was revealed that Aol intends to ramp from 31,500 pieces of editorial content per month today, to 40,000 by the end of Q1. Some have criticized Aol’s approach as “content farming”, a practice that Google said it plans to demote in its rankings in the near future. Aol’s acquisitions of highly successful, branded blogs may be a safer approach.
- Engagement – last year, Aol announced Project Devil; an attempt to drive premium ad rates and to make display advertising more engaging through larger formatting, cleaner design, and more interactivity. It may prove to be a smart move, but by itself, doesn’t do enough to convert an “active” medium into one in which brand messages will be seen or heard. For that, Aol needs online video into which it can place pre-roll advertising. Aol’s strategy document indicates that its ambitions here, to embed video in 70% of its owned and operated pages from only 4% at the end of last year, are even greater than that for its content growth. And it’s off to a good start. In a letter explaining the HuffPo deal to employees, Tim Armstrong indicated that Aol’s video UVs are up 400% Y/Y for 2010, which wouldn’t be so impressive if he didn’t also mention that they already exceed those of Hulu.
About 3 minutes and 45 seconds into an eight minute interview with AllThingD’s Kara Swisher, Tim Armstrong and Arianna Huffington help justify the deal by citing their shared vision “… to create the future of brand advertising on the Internet …” To reach that destination, many efforts must go right, including those that extend well beyond this partnership, and especially with regards to its video strategy. So far, the trends are in its favor. If they continue this way, Aol could very well pull off one of the great turn arounds in history, and indeed, create the future of online brand advertising.