AOL makes $405 million bet on Internet video, ads

AOL announced better-than-expected profits on Wednesday, and plans to acquire video advertising platform company Adap.Tv for $405 million.

This deal marks a "very important day in AOL history," AOL Chairman and CEO Tim Armstrong told CNBC moments after the company released earnings.

"Three or four years ago, most people probably thought AOL wouldn't be around at this point," he joked in a "Squawk Box" interview, while touting the importance of Adap.Tv to AOL's future. It will "double AOL revenue in the video space."

AOL will pay $322 million in cash and an additional $83 million in stock for Adap.Tv. Armstrong said a "fair price" was paid for a "great company."

(Click here to see how AOL shares are moving in pre-market trading.)

While providing software that enables targeted ads to be served to video users, Adap.Tv is also a marketplace of ad buyers and sellers.

"Software is going to actually improve advertising over time dramatically," Armstrong predicted. "The way that people think about Google [ads] with search, you could think about Adap.Tv for video."

The deal adds to AOL's big push to become a major video, content, and advertising player on the Internet. Three years ago, the company bought the 5Min Media and Goviral video services, and then added in 2011 The Huffington Post to the mix.

"There's roughly a $240 billion industry in the TV advertising business, which is going to go from TV to [Internet]-delivered video over the next decade," Armstrong said. "[Adap.Tv] was built to essentially make that transition for advertisers and marketers and for agencies … to help them move their TV budgets to IP-delivered TV."

The recent success and critical acclaim of "House of Cards" and other original programs on Netflix has drawn attention to the potential viability of IP-delivered television. Coupled with the fight between CBS and Time Warner Cable, the discussion about alternative delivery methods for television programming has certainly been gaining traction.

That's where AOL hopes to step in. "Advertising for the last 100 years have been bought in bulk," Armstrong explained, "We believe the future in advertising is going to be bought more like eCommerce, where you understand the individual asset you're buying and you're able to plan, target, measure, and do deep data analytics around advertising."

Meanwhile, AOL posted earnings of 35 cents a share, on revenue of $541.3 million Wednesday. That compared with earnings of $10.71 a share in the year-ago period. During the second quarter last year, AOL sold a group of patents to Microsoft for more than $1 billion.

Analysts polled by Thomson Reuters had expected AOL to post earnings of 32 cents a share, on revenue of $540 million.

—By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC. Reuters contributed to this report.