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AOL Is Gussying Itself Up for an Advertising IPO

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What’s behind all the shuffling going on at AOL lately? New CEO Randy Falco is moving the headquarters from Dulles, Va. to New York City, more layoffs are rumored at the dying dial-up business, and all the advertising businesses are now grouped together under the ominous name, Platform A. Falco is putting all of his advertising eggs into Platform A, which is made up of the collection of outward-looking ad networks that AOL has bought over the past few years—Advertising.com, Tacoda, Third Screen Media, Lightningcast, and AdTech. The former CEO of Tacoda, Curtis Viebranz, will be heading up Platform A.

One knowledgeable source tells TechCrunch that the decision has been made internally at Time Warner to try to spin off Platform A through an IPO sometime early next year. (AOL declines to comment). A lot needs to happen before that plan is put into action, but the writing is on the wall. Web advertising is still hot. It’s just not so hot on the AOL portal itself anymore. (In fact, the most recent AOL ad shortfall cost AOL Media Networks president Mike Kelly his job). But Platform A is AOL’s way of turning itself inside-out, and refocusing on serving ads outside of AOL across the Web. An AOL spokesperson confirms to me: “The introduction of Platform A marks a significant change in how we operate—putting AOL’s overall network in front of our advertising sales strategy.”

To prepare for a possible IPO, AOL will soon fold in all of the ad sales people who currently sell inventory across AOL.com (the group Mike Kelly oversaw) into Platform A, which is primarily driven by revenues from Advertising.com. In other words, AOL’s money-making focus will shift from selling ads on its own Web properties to selling ads on other Websites. AOL’s total advertising revenues are running at about $2 billion a year($522 million in the June quarter), and should eclipse subscription revenues soon (which were $691 million in the June quarter, and dropping like a rock). Falco’s bet is that those ad networks are the right eggs to offer up to the public markets. But this might end up being another rainbow-chasing move on AOL’s part.

Based on the past year’s deals in the online advertising space (Google/Doubleclick, Yahoo/Right Media, Yahoo/BlueLithium, Microsoft/aQuantive), Time Warner could expect to get a valuation of 18 to 20 times EBITDA for Platform A. I am not going to try to back into an EBITDA number for AOL’s advertising businesses, which it does not disclose. But another way to look at it is that Google agreed to pay 10 times revenues for DoubleClick. You could argue they are overpaying, assuming the deal doesn’t get squashed in Washington, because they are Google. But that would give Platform A alone a top-end valuation of $20 billion, which is what all of AOL was valued at when Google took its 5 percent stake.

You might recall that there has been repeated talk over the past year of spinning off the entire AOL unit as a separately traded company. The problem with that idea is that nobody wants the dial-up or portal businesses. Those will just continue to whither until the last remaining cash has been squeezed from their teats. Platform A, meanwhile, is a pure Web advertising business divorced from what most people think of as AOL today. And that’s a good thing. The folks at Time Warner just need to come up with a more palatable name for it like, uh, Advertising.com.

(Disclosure: I am a former employee of Time Warner and, as such, own some Time Warner stock).

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