AOL Ad Revival Still on Track

America Online, the beset Internet unit of AOL Time Warner , has continued to turn around its flagging online ad unit despite its declining subscriber numbers.

The key to AOL’s ad strategy has been to focus on tailored ad sponsorship deals that intertwine with the online service’s content. Another big help has been the interactive marketing industry’s belle of the ball: paid search.

Subs Down, Online Ads Up

According to SoundView Technology Group analyst Jordan Rohan, AOL is benefiting from a revived online advertising industry that has begun to give advertisers the tools to make easy comparisons to other media.

“Our industry contacts confirm that the online advertising market is robust in both banner and paid-search advertising,” Rohan wrote in a research note on Wednesday. He said AOL has seen demand from a number of sectors, including entertainment, automotive, and e-commerce.

As a result, Rohan has upped his estimates for AOL’s advertising revenue for the second quarter 15 percent, from $256 million to $295 million. Last quarter, AOL finally stanched the bleeding in its online advertising business. Don Logan, head of AOL Time Warner’s media and communications group, said AOL would end the year selling more advertising than in 2002.

Such solid growth in ad revenue would be all the more impressive since it comes as AOL’s prized asset, its huge customer base, loses steam. Last quarter, AOL reported losing 289,000 subscribers to finish March with 26.2 million. According to a report in Wednesday’s Washington Post, subscriber losses have gathered steam, with AOL losing 1 million subscribers since late last year. Rohan upped his forecast for subscriber defections for the second quarter from 450,000 to 700,000.

One of AOL’s top executives even admitted recently that the erosion of the Internet service’s bedrock dial-up base has been swifter than the company expected.

AOL has pegged the loss of dial-up subscribers arises to consumers switching over to high-speed broadband connections or lower-priced Internet access alternatives, such as NetZero, which offers access at half the price of AOL.

New Approaches

However, AOL has reordered its approach to advertising under the watch of former Entertainment Weekly publisher Michael Kelly, brought back to the company last fall to head cross-media initiatives.

Kelly’s drive to finally capitalize on the many assets of AOL’s sister media companies finally appears to be paying dividends. In the past few months, AOL has struck cross-marketing deals with Boeing to promote its new plane and Dutch bank ING to raise its consumer banking profile in the United States. The ING deal, which taps into a number of AOL Time Warner media properties, is worth $30 million over three years.

Rohan estimates that AOL has booked $85 million in upfront ad buys in the second quarter, an increase over last quarter’s $71 million. He attributes the rise to AOL’s new content-related offerings and more prominent placements, such as those on the Welcome screen. The auto and entertainment industries have also shown strong demand, according to Rohan, looking to buy ad space beforehand to mesh with movie and vehicle debuts.

In addition AOL has moved to expand its offerings, yesterday announcing the launch of a home and real estate section through a partnership with Homestore.

Paid search has been another new avenue for revenue growth. Rohan estimates the company’s revenue from keyword listings, through its partnership with Google, will return three times internal predictions.

AOL remains a key player in search. According to comScore Media Metrix’s qSearch service, in April AOL handled the third most searches, trailing Yahoo! and Google but beating out rival MSN. The measurement firm pegs AOL’s share of the U.S. search market at 16 percent.

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