Having steadied the ship by transforming AOL from a slumping Internet gateway to an ad-driven digital-media operation, Chief Executive Tim Armstrong is marking his biggest takeover yet at the company, unveiling a deal for video-ad marketplace Adap.tv.
The company said it will buy Adap.tv, a video-ad marketplace platform, for $405 million in cash and common stock. It's the biggest deal since Armstrong took the helm of AOL from his post as Google's advertising sales guru in 2009, eclipsing the $315 million spent on The Huffington Post in 2011.
The move shows where Armstrong's heart at AOL lies, not only in video ads but also in so-called programmatic ad models. Adap.tv is a programmatic video advertising firm, which means it uses software to automate the matching of buyers and sellers of ads.
"Let me take my chairman- and CEO-role hat off for a minute. If I had to pay more percentage of share of the Adap.tv deal myself personally out of my bank account, I would've paid it. I think it's that strong of a deal on both sides," he said during a conference call to discuss third-quarter results.
He said earlier that Adap.tv would make AOL a "clear global leader" in online video, which he called the most important growth segment in its industry.
Spending on digital video advertising is expected to grow 41 percent to $4.09 billion in the U.S. this year, and programmatic ad buying is expected to grow 73 percent, according to estimates from market research firm eMarketer.
AOL said Wednesday that Adap.tv's revenue has at least doubled every year in the last three.
Though AOL's Adap.tv takeover will give it a stronger foothold in one of the fastest-growing sectors of the online ad market, it still faces stiff competition from the likes of Google and Facebook, which are growing their ad businesses faster. Compare AOL's advertising revenue growth of 7 percent in the second quarter to Google's 15 percent and Facebook's 61 percent.
AOL's goal of late has been to strengthen and expand its media brands, like The Huffington Post and original video programming, emphasizing higher-profit video ads over traditional banner ads. To cap the end of 2012, AOL reported its first sign of revenue growth in the past eight years.
The Adap.tv deal most recently follows AOL's hiring of Bob Lord, the man who led giant ad agency Publicis Groupe's digital-technologies wing, while also striking a partnership with Publicis to jointly offer live advertising on AOL's digital network. Before that, AOL was early on the video ad scene, buying video-syndication service 5min in 2010 and developing its AOL On video network.
In addition Wednesday, AOL released its results for the second three-month period of the year. Earnings plunged in the second quarter because the prior-year period included a huge gain from a $1.1 billion patent deal with Microsoft, but the latest bottom line was better than expected, and ad revenue continued on a steady pace in the right direction.
Overall, AOL said Wednesday that advertising revenue in the second quarter increased 7 percent to $361.2 million from a year earlier. Search revenue was up 8 percent year over year, and global display revenue was up 5 percent on AOL sites.
Internet-access subscription revenue fell 5 percent to $166 million from a year ago.
AOL reported a profit of $28.5 million, or 35 cents a share, down from $970.8 million, or $10.17 a share, a year earlier. Revenue rose 1.9 percent to $541.3 million.
Update, 11:02 a.m. PT: Adds executive comments from earnings call and further detail about Adap.tv.