America Online 2014 Annual Report Download - page 52

AOL INC.
PART II—ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
marketing executions across all screens, formats and inventory types. ONE is designed to combine data,
attribution, and our buying platforms to provide advertisers with predictive analytics that provide immediate
insights on metrics like reach, frequency, and performance, and post-campaign insights that look across all
screens and formats to deliver immediate impact on relevant metrics.
In 2014, we significantly increased the amount of AOL Properties inventory going through our
programmatic channels. In order to align our organization with this new trend, we restructured the way we go to
market as a sales organization in the first quarter of 2015. We expect that the salesforce realignment will
adversely affect display revenue in the first half of 2015. However, we expect that year over year trends in
display revenue in the second half of 2015 will improve over the first half of 2015.
We have different cost structures within our advertising operations. As we generate additional advertising
revenues on AOL Platforms, we have historically incurred higher TAC expenses associated with that revenue as
compared to advertising revenues generated on Brand Group or Membership Group properties. While a majority
of the costs associated with generating advertising revenues on AOL Platforms are variable, a majority of costs
associated with generating advertising revenues on Brand Group and Membership Group properties are fixed.
Therefore, to the extent we can generate higher revenues on Brand Group and Membership Group properties
where we expect higher incremental margins, the increase in adjusted operating income before depreciation and
amortization (“Adjusted OIBDA”) will be greater than it would be with an equivalent increase in advertising
revenues on AOL Platforms. Similarly, we have recently increased our marketing efforts related to search in
order to drive increased usage of our search products across the internet. Due to the higher TAC incurred
associated with these additional marketing efforts, search revenue generated as a result of these marketing efforts
results in a lower margin than revenue generated by a user coming directly to our products.
We believe that video enhancements across our owned and operated properties and third party websites can
enhance our advertising product offerings and increase monetization and distribution of our content. We seek to
launch new format enhancements, increase advertiser adoption of these formats and attract additional publishers.
We aim to create products that will deepen our relationships with existing advertisers and attract new advertisers
by providing them with effective and efficient means of reaching targeted audiences through premium video
experiences. We remain focused on the continued expansion of our video platform for both our properties and
our partners. Through our video platforms we offer advertisers, publishers and agencies a means of planning,
buying and measuring video advertising programmatically across the internet, television and mobile video.
2014 Developments
Acquisition of Gravity
On January 23, 2014, we acquired Gravity, a company that provides content personalization technology and
publisher solutions to create relevant consumer and advertiser experiences, for a purchase price of $83.2 million,
net of cash acquired. In addition, $7.6 million of cash consideration was deferred and will be paid over a two-
year service period to certain Gravity employees. As part of the transaction, we acquired net operating losses,
which are expected to result in a future cash tax benefit.
Disposition of Patch
On January 29, 2014, we completed the disposition of a majority interest in Patch, retaining a 40% minority
interest. This transaction did not have a material impact on our financial statements.
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