AOL released their Q3 earnings this morning, and surpassed pretty much everyone’s expectations. Their total revenue came to $561.3M, topping a predicted $549M, while their adjusted EPS was $0.55, beating analyst predictions of $0.51. AOL also gave some insight into their different core businesses, reporting year-over-year advertising revenue grew for the 3rd consecutive quarter, along with year-over-year search ad revenue for the 5th consecutive quarter. That last part may come as a surprise to many, who likely didn’t know that AOL still offered search. In fact, their entire Q3 performance may come as a surprise to those who assumed AOL was continuing to slowly slide into irrelevance. After all, internet home-pages, or content portals, haven’t exactly been in hot demand lately (remember the last time you went to MSN.com?) Which begs the question – what is AOL doing and how is it working?
It’s Not About Users (Anymore)
In order to answer that, it’s helpful to look at another company also in the midst of a revitalization, albeit of a very different kind – Yahoo. While Marissa Mayer is focusing on re-imagining Yahoo’s services and re-engaging users, AOL is putting distinctly less emphasis on user experience, or users at all. Over the course of the past two years, Mayer has overseen a complete redesign of Flickr, Yahoo Mail, Yahoo’s homepage, and many other services. AOL meanwhile is still telling mobile users to access their mail via web apps. And while Yahoo has rebuilding their services, AOL has pretty much outsourced all of theirs.
AOL’s search, for instance, was outsourced to Google in 2005, and then handed off again in 2010. Eventually, AOL search won’t exist at all, and neither will their homepage. While there are still a crazy amount of subscribers that pay for AOL (about a quarter of a million), their Q3 report shows that number continuing to decline. “Domestic AOL-brand access subscribers” (as AOL’s financial statements label them), declined by 13% year-over-year, and contributed to a 7% decline in subscription revenue. Their churn rates actually improved slightly, but that’s to be expected as overall numbers shrink. It’s not hard to see why, either. Here’s what their homepage looked like this morning:
Essentially it’s fine, which is also why it’s no longer relevant. There are news stories that can be found other places (probably faster), and links to read horoscopes, check the weather, etc. The content throughout is sparse. Overall, the entire page is bland, and clearly not one of AOL’s priorities. Which is why they’ve outsourced their major services, and aren’t embarking on any redesign schemes, like Yahoo. The site won’t actively drive away existing users, but it certainly won’t attract any news ones, or even keep those who have grown bored. AOL knows that, and has made a calculated bet that their future doesn’t lie in that direction.
Becoming a Parent-Company
AOL isn’t abandoning its consumer products, but it certainly isn’t giving users a reason to stick around. Instead, the company seems focused on becoming a web media parent-company. It explains their rationale for purchasing popular tech site Engadget in 2005, TechCrunch in 2010, and the Huffington Post in 2011. But more importantly, it explains why they don’t seem at all interested in branding these sites. Check out TechCrunch’s homepage:
There’s no immediate indication that AOL is involved, let alone owns the site. No logo, no name – nothing. It’s the same story at the Huffington Post and Engadget – you have to scroll all the way to the footer to find any mention of AOL at all. It might seem odd, but this is by choice. AOL seems to be making a clear distinction between their previous role as a direct portal (where their brand interacted with consumers), and their new role as a parent-company (where their brand interacts primarily with other companies). Much like you don’t see the Mondelez International logo on the front of Oreos, you won’t see the AOL logo on their subsidiary brands either. AOL, in other words, is now an enterprise company, not a web service company.
That’s why you probably didn’t hear about it last month when comScore reported that AOL’s video ad network was number one in the United States in terms of total views, and view duration. That includes ads viewed through recently acquired firm Adap.tv, which specializes in so-called programmatic ads, or real-time ad bidding and matching. That acquisition, and AOL’s focus on expanding its premium video ad platform, were responsible for a 32% year-over-year growth rate in so-called “Third-Party Network” sites. Those are sites like the Huffington Post, and Engadget, which represent an increasingly large revenue stream. Don’t be surprised if in the next decade, AOL’s business is entirely made up of such third party sites.
All of this isn’t to suggest that AOL has found a magic formula for success. While their revenue and OIBDA numbers for Q3 are certainly impressive, they also missed wildly on profits (like, down 90% year-over-year missed). That’s mostly due to their hyper-local news service Patch, which has done nothing but burn through money without a clear purpose. AOL finally made some drastic cuts to the service this year though, and insists that Patch will at least stop losing money while they figure out what to do with it.
For web users who haven’t directly interacted with AOL in years, their increasing prominence as a parent-company is both noteworthy and surprising. For businesses, it provides an example of a successful large-scale pivot, based on realistic assessments (AOL’s decision to not compete on services), and smart acquisitions. Far from struggling, AOL seems to know exactly where it’s going.