by Jonathan Berr | April 1, 2014

AOL (AOL) Chief Executive Tim Armstrong is making a big bet on programatic advertising to help keep the ol’ Internet giant ticking.

Unfortunately, a number of other companies are betting on the ad system, too, and the results haven’t been promising.

Everybody, Into the Pool!

The parent company of Huffington Post and Moviefone recently announced the launch of One, a new programmatic advertising platform — a fancy way to say that it sells ads through automatic exchanges.

These ads, according to some experts, tend to sell at rock-bottom rates, in part because advertisers don’t have any control over where they are placed.

AOL, not surprisingly, doesn’t see pricing as an issue.

“Automation does not change the value of premium and we believe premium brands, inventory, formats, audiences and experiences can and will achieve premium prices in a programmatic environment, ” spokeswoman Caroline Campbell, said in an email. “If publishers know the true value of their inventory (backed by data) they should be indifferent as to how the inventory is sold.”
And even though AOL’s end-to-end solution is more comprehensive of most … it’s still just one of many, many faces in the programmatic advertising crowd.

For instance,  Yahoo (YHOO) unveiled its programmatic advertising service last year and announced an upgrade in January. Google (GOOG) has a service that counts magazine giant Time Inc. as a partner. News Corp. (NWSA) is trying to cash in on the same trends; the company announced last year that it would launch a new programmatic advertising platform and began wooing advertisers to its network during the upfronts last year.
Programmatic advertising spending is expected to account for 30% of digital ad spending, or about $9 billion, in 2016 vs. 20% in 2013. While that forecast is certainly encouraging, it’s important to remember that digital ad prices are trending lower on big sites such as Google, where they plunged 11%[8] in the latest quarter. Twitter’s (TWTR) ad prices fell by 18% in the last three months of the year.

The microblogging site, of course, has jumped on the programmatic bandwagon, too.

Problems With Programmatic Advertising

It’ll be interesting to see whether ad sales for AOL’s marquee properties can maintain their pricing power. After all, programmatic advertising sales have yet to pay off for many publishers.

During the latest quarter, revenue at News Corp.’s News and Information business fell by 9% year-over-year, and CEO Robert Thompson said the advertising climate was “challenging” — perhaps the understatement of the year.

Yahoo didn’t fare much better. Display ad sales plunged 6% to $520 million in the fourth quarter and fell 9% to $1.9 billion for the full year. Yahoo CEO Marissa Mayer fired COO Henrique De Castro, and while she hasn’t given up on programmatic advertising sales, she admitted that Yahoo’s sales force isn’t going to be entirely replaced by computers.

Yahoo Chief Executive Marissa Mayer fired Chief Operating Officer Henrique de Castro but hasn’t given up on programmatic ad sales, either. Even so, she admitted that Yahoo’s sale force isn’t going be entirely replaced by computers.

As Mayer recently told USA Today: “There will always be an opportunity to run large ads on Yahoo’s homepage that guaranty [sic] advertisers this valuable space for an agreed amount of time. … It’s hard to imagine that kind of custom placement would ever be sold by machines.”

The New York Times Co. (NYT) recently blamed the increase in programmatic advertising for the company’s dismal Q4 results, where digital ad revenue fell 0.2%. Not surprisingly, the company’s first director of programmatic advertising was let go.

The technology is certainly is no panacea.

“Programmatic is one option out of a growing growing number of options that has to be carefully managed to ensure the highest yield, and it is not a static process, ” said Tom Adams, director of SQAD’s WebCosts, in an email. “The price of programmatic inventory will vary based on the variables involved in a bid. Depending on how this inventory is managed will determine price and yield at the end of the day.”

Writing last year in Advertising Age,  entrepreneur Joe Mohen described the technology, also known as real-time bidding, as the “most overhyped technology ever.” He described a situation where the owner of a “first-class entertainment site” (which he declined to name) decided to start selling his ads programmatically. According to Mohen, the publisher set a floor price on a cost per thousand (CPM) basis of $1.50, well below the $7 he had been getting.

After inventory failed to move, Mohen said the site owner’s suggested lowering his price.

That didn’t work either.

“Within three months, it became clear that moving high-caliber inventory on a premium web site to programmatic was a disaster, and the publisher quickly moved back to a direct-sales operation, ” he writes. “It was an expensive lesson.”

Bottom Line

Shares of AOL, which are trailing the market at 4% losses year-to-date, still trade at a lofty price-to-earnings multiple of 38. For comparison’s sake, YHOO — itself full of holes — trades at 28.

Wall Street might be betting that AOL will get plenty of bang for its programmatic advertising buck. And while I think the stock is worth buying, I urge investors to tread carefully here.