RealTime IT News

Chilly Economy Saps AOL's Ad Revenue

AOL and Time Warner
Time Warner reported today that advertising revenue for its AOL division dropped 6 percent in the third quarter, as the media conglomerate lowers its full-year earnings outlook amid its struggles with a weak economy.

The company's total third-quarter revenue of $11.7 billion proved essentially flat compared to the same period last year, with strong results from cable networks offsetting declines at AOL and the Time Inc. publishing division, which the company plans to restructure by the end of the year.

Speaking on a conference call with financial analysts, Time Warner (NYSE: TWX) CEO Jeff Bewkes made the case that the company is well positioned to weather the economic storm because the bulk of its revenues come from premium content, which is generally better insulated from recessionary conditions than ad-based business lines.

"Our businesses have proved to be resilient in a very challenging environment," Bewkes said. "We fundamentally believe that we can position our company structurally to make better, more popular content on a more consistent basis."

But AOL's future is based on advertising. Time Warner is in the process of separating the unit's online media business from the eroding dial-up Internet service, which lost 634,000 subscribers this period, leaving it with about 7.5 million.

AOL's overall revenues declined 17 percent, or $207 million, from the third quarter in 2007. The dial-up business accounted for most of that decline, but AOL's media business was weighed down by softness in display advertising on its own sites and its third-party network.

One bright spot was AOL's paid search advertising, which increased 12 percent from the year-earlier period. Search advertising has proven to be a more stable channel than display ads when marketers see their budgets cut and demand a measurable return on investment.

AOL has been in the process of revamping each of its Web sites, including AOL.com, and reported a 14 percent increase in page views in the quarter as a result of those efforts. Increased traffic will drive ad revenue, though AOL saw advertisers move away from higher-priced, premium inventory in favor of cheaper, non-guaranteed ad buys.

Still, Time Warner CFO John Martin looks for the secular shift -- the move from offline to online ad spending that's driving double-digit, year-over-year growth rates in the ad businesses of competitors like Google and Yahoo -- to eventually lift AOL's ad business.

"Over time, we expect that branded advertising dollars currently being spent on other mediums are going to shift online to search and display," he said.

AOL's future is clouded by its uncertain position in a very fluid online advertising market. Earlier today, Google announced that it had pulled out of a proposed partnership for search ads with Yahoo. The news revived speculation about the beleaguered Web pioneer's options for restoring value to its shareholders, following a slump that came in the wake of the breakdown of talks with Microsoft about a buyout earlier this year.

AOL has long been rumored to be involved, as Time Warner has been in extensive talks with Yahoo about some form of tie-up between the two companies.

On this morning's call, Bewkes demurred when he was asked about the prospects for a deal.

"The opportunities or possibilities remain open for this whole business to restructure itself and to build adequate scale to compete with whoever is in the lead position," he said.

Meantime, AOL has been aggressively cutting costs through a combination of layoffs and reductions in overhead, which Bewkes said produced its highest margins in years.

Going forward, he said that there could be additional cost cutting as management takes a hard look at the business.

But it will also continue to invest in new initiatives, such as the ad exchange AOL is planning to launch next year, to be called Bit Place.

Bewkes said the ambitious goal of that venture "is to open up the long tail of display advertising, which is essentially what Google has done with search."