For $640 million, Yahoo expects to have bought its way back to growing its display advertising revenue for the first time in two years.
On Tuesday Yahoo said it has agreed to acquire BrightRoll, a company that specializes in automating the sale of video ads, enabling marketers to pick up pre-roll ads as easily as if they were a baseball card on eBay.
Not coincidentally, BrightRoll's focus on video and programmatic at tech addresses the biggest weak spots in Yahoo's advertising business: premium advertising and programmatic sales. Yahoo's display advertising business, including video, hasn't grown its quarterly revenue year-over-year since the third quarter of 2012. But Yahoo's senior VP-advertising technology Scott Burke said the company expects to reverse that two-year slide next year -- thanks to BrightRoll.
"These guys are generating over $100 million net [revenue] in 2014," Mr. Burke said. "That combined with Yahoo's assets will ensure that we return to growth in 2015 in the display business."
Yahoo has had a hard time getting advertisers to pay for its own higher-priced, premium ads, but video advertising happens to be the most premium of digital ad types: Advertisers often can't get enough of it. Yahoo also isn't making enough money from ads sold on its own sites and hasn't been able to make up for it by selling ads on others' sites; BrightRoll sells ads on tens of thousands of sites and mobile apps.
"Yahoo has had a successful video owned-and-operated business, but we have not built out our off-network and third-party and platform business in video," Mr. Burke said.
The same could actually be said of Yahoo's overall off-network business. The company has made money from selling ads on others' sites for years, but for the past seven quarters, Yahoo's ad network business has only contributed between 10% and 12% of its total display revenue each quarter, and grew only 3% in the second quarter and 6% in the third.
That wouldn't be so bad if it weren't for the fact that Yahoo's owned-and-operated ad business weren't struggling. Yahoo's revenue from display ads sold on its own sites in the second quarter fell 9% from the quarter a year earlier, and then by 6% year-over-year in the third quarter.
In a regulatory filing published last week, Yahoo said its advertisers in North and South America -- its most important region -- spent $20 million less on the company's owned-and-operated ads in the third quarter than they did a year ago. And they only increased their network spend by $3 million.
Yahoo wants the proportion of revenue from its ad network to rise significantly, but Mr. Burke declined to specify the ideal level. "We need it to be a healthy balance between the [owned-and-operated business] and the network," he said.
Buying BrightRoll isn't Yahoo's only move to address its premium and programmatic challenges, Mr. Burke said, pointing to the recent hires of Lisa Utzschneider and Kevin Gentzel, both of which are expected to bolster premium ad sales. Ms. Utzschneider had been Amazon's global ad sales chief but will start as Yahoo's senior VP of sales for the Americas next week. And Mr. Gentzel began work as Yahoo's head of advertising sales for North America after stepping down as The Washington Post's chief revenue officer last month.
On the programmatic front, Yahoo also bought mobile ad network Flurry for $270 million and overhauled its own existing ad-tech business. Combined the BrightRoll, the companies will help Yahoo pitch marketers on extending their campaigns beyond Yahoo -- without extending their spending elsewhere as well. Google and Facebook are similarly trying to become a one-stop shop for advertisers.
"When you talk about P&G or Kellogg's or WPP, they have such a budget to spend and they're looking for fewer, larger strategic partners to help run their media plans," Mr. Burke said. "We know they will never spend all their money on Yahoo. What we want to do is be their partner in how they think about how spend that across different channels."
BrightRoll will certainly bolster Yahoo's desktop ad network, given that it's the country's biggest desktop video ad seller. But it's unclear how big BrightRoll's mobile business is. BrightRoll CEO Tod Sacerdoti declined to say how much money his company makes from mobile ads and how many of the video ads it sells are run on smartphones and tablets.
"BrightRoll is representative of video spend on the internet," Mr. Burke said. "We're comfortable as the acquirer that they're seeing healthy trends in the shift to mobile."
Yahoo recorded more than $200 million in mobile revenue in the third quarter and expects to the figure to surpass $700 million for the year. When Yahoo reports earnings after the BrightRoll deal closes -- which is expected to happen in the first quarter of 2015 -- BrightRoll's mobile revenue will count toward Yahoo's overall mobile revenue, Mr. Burke said.