Settlement in the Air at Time Warner


Four years after its turbulent merger with America Online (AOL), Time Warner is finally getting the messed cleaned up. Appeasement is in the air. More importantly, settlement money is in the bank.


Wednesday, the media giant announced it is setting aside $3 billion to settle class action suits with disgruntled shareholders. The huge settlement
fund resulted in Time Warner announcing a net second quarter loss of $321
million.


Hours later, the Federal Trade Commission (FTC) announced Advertising.com,
now a subsidiary of AOL, settled charges that it violated federal law by
offering free security software, but failed to disclose adequately that
adware was bundled with the software.


According to the complaint, the adware collected information about
consumers, including the URLs of pages they visited. The information was
then used to send them unsolicited advertisements.


The FTC complaint charged that in representing SpyBlast as an Internet
security program, Advertising.com did not adequately disclose that the
anti-spyware program included adware that caused consumers to receive pop-up
ads.


“The problem here was not the security software that Advertising.com
disseminated with its adware,” the FTC stated. “Instead, it was the
respondents’ practice of downloading software onto users’ computers, without
adequate notice and consent, that generated repeated pop-up ads as the
computer users surfed the Web.”


The FTC said the failure to disclose amounted to a deceptive trade practice.
The consent order prohibits Advertising.com from making representations
about its security or privacy software unless the company “clearly and
conspicuously” discloses that adware is also included in the download.


“This company offered SpyBlast, a free security program to protect against
hackers,” Lydia Parnes, director of the FTC’s Bureau of Consumer Protection,
said in a statement. “But consumers who downloaded SpyBlast also downloaded
a form of software that followed their electronic comings and goings and
force-fed them pop-up ads.”


Last June, AOL acquired
the Baltimore-based Advertising.com for $425 million in cash. It was the
largest acquisition by AOL since its merger with Time Warner. Wednesday,
Time Warner reported Advertising. com accounted for $60 million in
advertising revenues for AOL. Paid search resulted in $30 million in
revenue.


Overall in the second quarter, AOL generated total revenues of $2.1 billion
with advertising revenues up 45 percent to $320 million.


The bad news for AOL: it lost nearly a million subscribers, almost four
percent of its subscriber base as dial-up subscribers over age 15 fled in
droves.


The Advertising.com settlement comes after years of embarrassing post-merger
snafus that include charges of stock price manipulation, inflated
advertising revenues, federal investigations into accounting practices,
class action suits and high-level management churn.


In October of 2002, for instance, the newly merged AOL and Time Warner
announced it would restate financial results for eight prior quarters. The
restatement came after an internal probe of AOL’s accounting practices. By
the end of the year, the company took a massive $54 billion asset impairment
charge
when it filed its 2001 annual report. Months later, the company took another
$10 billion charge against earnings.


In March of 2003, AOL said it would restate up to $400
million in revenues as the result of an ongoing Securities and Exchange
Commission probe over how its AOL unit accounted for advertising deals.

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