Why AOL Just Spent $405 Million on Adapt.tv

AOL just spent more than it paid for The Huffington Post to nab a company you've never heard of that will make it a lot of money. 

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AOL just spent more than it paid for The Huffington Post to nab a company you've never heard of that will make it a lot of money. For $405 million, CEO Tim Armstrong made his biggest acquisition since taking over the company in 2009 by buying Adapt.tv, a video ad platform. The new AOL property has compared itself to the Google of video ad sales and has made money fast, surpassing 100 percent revenue growth in each of the last three years.

Specifically, the company acts as the middle man of web TV ad buying, which fits right into AOL's video strategy. "AOL is a leader in online video and the combination of AOL and Adap.tv will create the leading video platform in the industry," Armstrong said in a statement. "The Adap.tv founders and team are on a mission to make advertising as easy as e-commerce and the two companies together will aggressively pursue that vision."

Armstrong and AOL made the shift to focus on video in 2010, first buying up a video syndication company with the hopes of moving the bulk of AOL's revenue away from the shrinking, but still very profitable dial-up market. Back then, AOL invested in original video, a la Netflix. In April of the next year, it announced its own On Network. Now an ad-sales platform to monetize all that content fits right into that vision.

In addition, Adapt.tv does the same "programmatic advertising" that Armstrong has evangelized. That type of advertising works more like a marketplace, as TechCrunch's Anthony Ha explains. "Ads are purchased in an automated, data-driven way, usually through real-time bidding," he writes. Armstrong has argued that this type of ad-buying will lead to more creativity and more revenue for publishers. In the current model the average publisher takes home 25 cents on the dollar. Programmatic advertising, with its efficiency and algorithms and data modeling, will somehow get brands spending more on web video. When Kellogg experimented with it, the brand saw a six percent increase in ROI.

Programmatic advertising is exactly what Adapt.tv deals in. "Two trends are prevalent in the video space right now – the movement from linear television to online video and the shift from manual transactions to programmatic media buying. Adap.tv is positioned squarely in front of the huge opportunity these trends are presenting," Armstrong said in his statement. While Adapt.tv insists it offers more than that, CEO Amir Ashkenazi emphasized its programmatic advertising strengths. "We believe that most TV advertising will soon be traded programmatically on platforms like ours," Adap.tv CEO Amir Ashkenazi said in his statement. "The combination of AOL and Adap.tv accelerates our vision of efficient and effective TV and video advertising."

This article is from the archive of our partner The Wire.