Will AOL’s ESPN Deal Strengthen Its Video Strategy?

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AOL Inc. (NYSE:AOL) may not be the powerhouse it once was, but a new partnership with Walt Disney Co.’s (NYSE:DIS) ESPN is another step toward firmly establishing itself in the growing video advertising business.

On Wednesday, AOL signed a syndication agreement with Disney-owned sports network ESPN in a push to acquire a bigger stake in the growing video advertising market. Under the terms of the agreement, ESPN will grant AOL syndication rights and join AOL’s digital publishing video-programming network, which also includes The Wall Street Journal, Sports Illustrated, and 1,700 other publishers, Bloomberg reports.

According to AOL Chief Executive Tim Armstrong, the move reflects the company’s efforts to transform into a content publisher driven by advertising. Ad rates for online video continue to outpace traditional Web ad placements as markets increasingly look to video as a way to run promotions. EMarketer Inc. says that digital video ad spending is projected to increase by 41 percent in 2013 to $4.09 billion in the U.S., and that number is sure to grow over the next several years.

The deal with Disney’s ESPN displays AOL’s push to acquire high-quality content to pair with video advertisements. Ran Harnevo, the head of AOL’s video unit, said in an interview with Bloomberg, “Advertisers tell us there isn’t enough quality inventory, and we’re working fast to deliver that.”

The agreement maintains that ESPN can sell short commercials at the start of each video clip, with AOL and ESPN sharing in the revenue. Additionally, publishers within AOL’s network are allowed to feature ESPN video content on their sites and receive a portion of advertising revenue.

Bloomberg reports that AOL’s ad business makes up more than two-thirds of sales. While the company’s video network received 71.2 million viewers in August, second only to Google Inc.’s (NASDAQ:GOOG) 167 million, the vast gulf between AOL and Google’s viewer numbers has pushed AOL to make up ground as video advertising becomes increasingly important.

The video strategy has also become important as AOL scales back its other content services, such as its hyper-local news service, Patch, which has eliminated 500 positions and said in August that as much as 20 percent of its 900 Patch websites could close down. Shares for AOL finished at $32.83 in after-hours trading, rising 0.37 percent.

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