AOL Gets Green Light to Buy Targeted Ad Firm

U.S. regulators on Monday gave Time Warner's AOL the green light to acquire behavioral analysis marketing firm Tacoda, clearing the way for a purchase that could boost AOL's online advertising prospects.

The Federal Trade Commission (FTC) listed AOL's buy of Tacoda among the mergers and acquisitions receiving so-called early termination under the Hart-Scott-Rodino Act.

The action means that staffers examining the proposed merger to evaluate the impact on consumers found no reasons why it should not go forward and that the commission agreed to stop evaluating the merger before the 30-day review period had ended.

Refining the Delivery Process

The decision will enable AOL to move quickly to begin refining its advertising delivery process, something that its most recent earnings report suggested has plenty of room for improvement.

AOL's decision to eschew its subscription model in favor of an advertising-supported portal approach has ratcheted up the need to deliver more effective advertising for clients, and it has used a string of acquisitions to improve its performance in that area.

The Tacoda buy was seen pushing AOL quickly near the front of the pack among Web companies using behavioral analysis to deliver ads to users that are more likely to be of interest to them -- which in turn makes users more likely to click-through, driving up per-ad revenue for the portal.

Yahoo (Nasdaq: YHOO) recently launched its own version of behavior-targeted ads, known as "SmartAds," and Microsoft (Nasdaq: MSFT) has promised that its ad system will enable refined ad targeting based on user interests and demographic factors.

No Privacy Holdup

The acquisition was widely expected to pass antitrust muster in the U.S., but the privacy implications of the Tacoda technology, which uses cookies to gain a greater understanding of a user's interests by tracking their online movements and activities, have drawn some criticism in the past.

The rapid review by the FTC may indicate a favorable climate toward the dramatic consolidation trend to hit the sector in the past several months. Yahoo purchased Right Media, Microsoft bought aQuantive and Google (Nasdaq: GOOG) sparked the recent buying spree by moving to acquire DoubleClick (Nasdaq: DCLK) -- a transaction that remains under FTC review.

Though terms of the buy have not been disclosed, published reports have pegged the value of the Tacoda deal at around US$275 million. That came on top of its earlier purchase of Advertising.com for around $500 million.

Time Warner's (NYSE: TWX) most recent quarter results indicate AOL needs the ad revenue lift that Tacoda stands to give it over time, JupiterResearch analyst David Card told the E-Commerce Times. Ad sales growth slowed markedly in the second quarter, with revenue up 16 percent compared to a previous expansion rate of 40 percent.

Since Tacoda has a track record already, AOL could use it to boost pricing of its display advertising, something that it and Yahoo have both struggled with in recent quarters even as more marketing spending by major companies is being done online.

"The Advertising.com buy seemed to pay off right away, and there's no reason to suspect Tacoda won't help over time as well," Card said.

Time Will Tell

AOL has clearly bet on a growing trend, with behaviorally targeted ads expected to be worth $1 billion in 2008 but $4 billion by 2011, eMarketer analyst David Hallerman told the E-Commerce Times.

While search advertising remains the driver of growth and profits for Google and others, "Targeted display advertising is exploding," he added.

"It's where the excitement is, where the eyeballs are and where the industry dollars are flowing," Hallerman said. Of course, that doesn't mean AOL will become a top purveyor of such ads, though it remains well-positioned with a strong online brand and a connection to Time Warner's extensive content resources.

Meanwhile, AOL may be purchasing some legal headaches with Tacoda, with a firm called "Modavox" suing it for patent infringement earlier this month.