AOL’s acquisition in 2004 of Advertising.com, a company which buys space on web pages and then resells it to advertisers looking to reach a specific type of customer, was barely noticed by analysts and investors.
It was hard to argue against AOL’s rationale for the deal, that for $435m it would give them a bigger foothold in the fast-growing online advertising space.
But at the time the uncertainty about how the internet giant would ever overcome the burden of its profitable but declining internet access business was the main concern.
Two-and-a-half years later, Advertising.com is driving much of the growth at AOL’s online advertising business. AOL, owned by media giant Time Warner, has found a way to leave the dial-up past behind it, giving its email addresses away for free and focusing entirely on increasing its share of the internet pie.
A switch at the top last year, with AOL chairman and chief executive Jonathan Miller replaced by NBC television veteran Randy Falco, sealed the changes.
Most importantly for shareholders, AOL has finally become a positive factor for Time Warner’s shares, which have languished since the ill-fated acquisition by AOL of the media group at the height of the 1990s internet bubble.
“The surge in AOL’s advertising growth has been one of the positive catalysts for Time Warner’s stock,” said Michael Nathanson, analyst at Sanford Bernstein.
With Advertising.com such a hit, AOL is now trying to extend this success. This week, it announced it had agreed to buy TradeDoubler, a Swedish online marketing company.
After months of negotiations, and a strong run-up in TradeDoubler’s share price amid rumours of a possible acquisition, AOL announced a cash deal of SKr 215 per share, or about $900m, and the agreement of around 20 per cent of TradeDoubler’s shareholders to back the deal.
Despite some shareholders seeking a higher price, which AOL says is out of the question, the move marks an effort by AOL to expand in the online advertising market.
Online advertising is the fastest-growing segment of the media business, with quarterly growth rates topping 30 per cent.
Search advertising, dominated by Google, whose share of this segment continues to rise, accounted for around 40 per cent of the $7.9bn in US internet ad revenues in the first half of 2006, according to analysis from PricewaterhouseCoopers.
AOL, which has a partnership with Google but does not have its own search capabilities, is focusing on expanding its presence in some of the other segments, where it competes with rivals such as Yahoo.
Display advertising, for example, is the area that Advertising.com dominates. It totaled $1.3bn in the second quarter of 2006, up for $1bn in the same period last year.
The technology owned by TradeDoubler was another reason for the acquisition, according to people familiar with the deal.
It specialises in a type of matching based around sales of goods and services.
For example, a computer manufacturer might make available a special offer on one of its products at a discount. Web-site owners, whose audience might be interested in such products, can advertise the promotions on their websites and then they get a share of any revenues from computers sold.
Investor attention will again focus on AOL at the end of January, when results for the fourth quarter of last year are released.
The internet group will need to maintain its heady pace, and persuade its shareholders that strong growth can continue despite growing focus on non-search advertising by Google and other rivals.