AOL, Inc. (NYSE:AOL) Chairman and CEO Tim Armstrong spoke with FOX Business Network’s (FBN) Maria Bartiromo about his thoughts on advertising and the possible Yahoo! AOL merger. Armstrong said,  “advertising right now I think is solid” and  there are “major shifts in advertising towards digital.” Armstrong went on to say, “it will cost advertisers more over time to advertise” even though “many people in the industry think the machines are going to make advertising cheaper.” Armstrong also commented on the possible Yahoo! AOL merger saying,  “I wouldn’t comment on Yahoo! Inc. (NASDAQ:YHOO) or Starboard” and that “I can only affect what we’re doing as a business and we’re trying to stay really laser focused on what our strategy has been.”

AOL CEO: Advertising Is Going To Get More Expensive

AOL CEO on the advertising business:

“Yes, advertising right now I think is solid, if you characterize it economic view, and I think underneath that what you’re seeing is major, major, major shifts in advertising towards digital.  And the first 20 years of the Internet have grown really quickly in the ads business overall, but really what’s happening now for the first time is that TV and the Internet are coming together.  So you have the largest global format of advertising which is TV, which up until maybe a year and a half ago, two years ago, hadn’t really been affected by the Internet and digital revolution.  Now those two things are coming together.   So you’re going to see advertising, number one — this is my bets on advertising — advertising is going to get more expensive.  For you to reach individual consumers is going to be more highly targeted.  It’ll be — the formats will be better, the brands and content’s going to get better, so it will cost advertisers more over time to advertise, which is not I think — many people in the industry think the machines are going to make advertising cheaper.”

AOL CEO on advertising becoming more expensive:

“Because right now advertising is done in bulk.  If you want to target a giant audience on TV or another site — sets of mediums, you pay one price and you go out to a bulk audience.  What happens is the difference between someone advertising to you and someone advertising to me and somebody advertising to somebody else here in the studio, there is a different value to all of us because we all have different interests and we focus on different things in our lives.   If I can tell you exactly what Maria wants from a product for service overall, I’m actually going to be willing to pay more for you individually than I would be at a bulk level.  And I think people have mistakenly said, oh, if it goes from bulk to singular, in terms of ad targeting, prices will  go down because I only want to target you and I’m not going to target all those other people.  The reality is you want to target everybody individually, and when you do that, the price of that is going to go up.  The second thing I would say is when you have a digital service, let’s say you’re on Amazon Prime as a customer and  you have preloaded shopping carts every time you go to shop.  The ability for me to get new products in your shopping cart is a lot more expensive because it’s so easy on Amazon to buy the same products over and over, you’re going to pay more to dislodge one of the products in my shopping cart and put a new one in.  So that’s why companies like AOL and our ad systems are really, really important, because we give advertisers the ability to go from bulk to singular in terms of ad targeting.  And that is a significant trend overall.”

AOL CEO on whether he sees advertising in slow mode:

“Yes, so there’s — the megatrends in advertising are the following: one is advertisers are going down to fewer bigger relationships on a global basis.  They’re transitioning to digital overall.  And they’re spending money — machines come in, the attribution of how ad dollars are working are becoming more transparent, so money is starting to shift to the platforms that work the best overall.  So a place you don’t want to be in the advertising business is in a generic place where you can’t do metrics against advertising.  If you’re in a transparent, singularly able to target consumers at high scale, which we’re able to do, that’s where money’s moving right now — and not just to us, but across the whole industry.”

AOL CEO on whether he is going to merge with Yahoo!:

“I’ve said publicly all along that our strategy has been built for massive scales.  So if you think about our systems that we build, video advertising and the global content brands, it’s all about scale.  I think in the businesses we’re going to and consumers are globally connected — we have 250 million users on our services right now.  We want to have a billion.  So, yes, we want to get to bigger scale. The way that we’re doing that is operationally running the company to very precisely invest in global content brands, video ad platforms, and our stance right now is to do what we’ve been doing.  Is we got the company back to growth by singularly focused on what we’re good at.  All the other noise you hear in the industry right now I believe is noise.  Because if we paid attention to everything that happened, noise-wise, in the industry, we wouldn’t be where we are today.  We’re probably the most focused company on where our strategy is going and we have been for four years.”

AOL CEO on whether Yahoo! could give them scale:

“So if you can find 750 million additional users for us bring them over… I wouldn’t comment on Yahoo! or Starboard.  I think AOL is a size — we’re in that conversation because we have a great strategy in general, but that’s a different conversation for two different companies at a time period.  I can only affect what we’re doing as a business and we’re trying to stay really laser focused on what our strategy has been.”

AOL CEO on how he is going to accelerate growth into 2015:

“I think taking a step back we’re in the early stages of the development of digital and I think with the introduction of mobile, which we have about 250 million global consumers, about half of them are on mobile right now.   We see the opportunity to drive growth in kind of three distinct areas.  One is really around the content brand’s business; we own “The Huffington Post” and “TechCrunch”, a number of other brands.  And to make those global platform brands.  Second piece is around the advertising business and that business basically is constructed of a platforms business, which has programmatic advertising, which essentially makes advertising as easy as e-commerce businesses.  And the other part of it is a big video business.  And the Internet has been about text; I think the next 20 years of the Internet will be about sight, sound and motion. And then the third area which is a big passion point for me and one of the reasons I went to AOL is to really rebuild the AOL brand.  And so if you take content, ads and video, and the brand of AOL, and we’ve been basically spending five years bringing that back, had almost two years in a row of growth across all those sectors, across consumer traffic.  So our growth right now is built off three or four of the most important areas of the future, the Internet, and we’re a nimble company now that’s moving really quickly and I think the opportunities for us in the future are really big.”

AOL CEO on video growth:

Yes, you have massive — outside of the United — you have urbanization, you have population growth, you have people getting connected.  So in the next few years, there will be two or three more billion people connected to the Internet, and the reality is once someone is connected you don’t disconnect from it.  And as a matter of fact, your usage tends to go up over time. And so if you look at the megatrends right now, video is a megatrend.  Only about 4 percent of video consumption globally right now is on phones, but it’s growing at 50, 60, 70, 80, 100 percent right now.  So if you go forward three or four years right now, you look to the fact that you’re probably going to have 50 percent growth of people on the Internet itself and then you’re going to have massive connectivity with mobile phones.  And video is the most engaging format for people, so if you put those three things together, you’re looking at probably one of the largest growth markets in any industry across the world.”

AOL CEO on trusted brands:

“When we bought “The Huffington Post”, for instance, Wall Street did not like it.  Wall Street said the Internet’s about scaled platforms only; content’s not going to matter.  Our stock got really hit after — this was a few years ago.  Today, they have 20 million users all on a blogging site in the U.S. today; it’s a global platform.  We’re just launching more.  We’re in 12 countries right now.  We have “Huffington Post Live”, which is the first cable channel for the web.  That’s just about to cross 2 billion views overall. So when you look at the investments that people in our industry, the smartest people in our industry, have made in the last 12 months, they look a lot like AOL’s investments from three years ago.  So our consumers have a paradox of choice.  They can’t handle having 100 things they have to worry about.  They want someone trusted and they want a trusted brand to help them sift through the information that they need in their lives.  The Internet’s not going to change that.  It’s actually going to accelerate the need for trusted brands.”

AOL CEO on monetize video:

“I think video will have multiple forms of revenue behind it in the future.  I think advertising will be really, really big and it’s become really, really big.  The second form will probably be subscriptions.  And the third form is what I would say is the e-commerce of video where you’re buying individual videos overall.  So if you look a marketplace right now, video ad revenue right now is $4 to $6 billion in the United States; it’s a $70 billion TV market.  My guess is that, like everything else that’s happened in the digital age, will transition to mostly IP-delivered advertising.  So that $4 or $6 billion is going to go to $10, $20, 30, $40 billion over the course of the next five or ten years. And then the second piece is I think subscriptions — right now you have a choice of having a cable subscription, you have a wireless subscription, you may have a subscription at OTT devices, like Netflix or the HBO Go.  Over time, I guess is that consumers will go down to fewer subscriptions that actually individually serve content to them on a more effective manner.  So you’ll have the combo dozen. Third thing is — my kids do it on Apple TV.  They buy movies or they buy shows that they want to watch.  And you’ll have three very good sources of revenue for video.”