AOL Time Warner Feels Little Pain From Ad Sector Woes

While the bleak advertising market was largely to blame for lower-than-expected revenues, media

behemoth AOL Time Warner still showed strength in its online sector — compared to peers in the

Web publishing industry — and a growing aptitude for lucrative cross-media deals.

The company’s America Online unit posted revenues of $2.13 billion, $706 million of which came

from advertising and
commerce. (The company doesn’t break out revenues further.) That’s actually a two percent

decrease from last quarter.

But co-chief operating officer Bob Pittman described a performance better than most other

online competitors — which don’t have an offline channel with which to tie ad deals.

“Our synergies are hitting, and they’re hitting big,” Pittman said. “This quarter … shows

just how critical our diverse revenue
streams are in this economy.”

Pittman said America Online had been successfully side-stepping most of the stigma attached to
Internet ads thanks to efforts at integrating client brand messaging with content.

“All of our online promotions are customized,” he said. “Subscribers … find these ads more

compelling than traditional
advertising.”

Evidently, those promotions also helped the offline portions of the company to shoulder the

advertising slowdown. Using
house ads on the America Online service, AOL Time Warner generated about 100,000 new

subscriptions per month to Time Inc.
magazines.

Additionally, promotion on America Online boosted traffic to former Time Warner Web sites 54

percent, while integration of
the company’s entertainment content has made AOL’s Entertainment Channel one of the leading such

sites on the Internet.

Pittman also referenced the vast slate of marketing agreements inked with traditional

advertisers — such as deals earlier this
month with Nestle, Philips and Samsung, deals that he described as “now becoming a way of life at

AOL Time Warner.”

One example was described in a separate announcement on Tuesday, in which AOL Time Warner

signed yet another cross-platform deal with a large advertiser — Clinton, Miss.-based telecom

giant WorldCom. That multi-million dollar agreement, a revamping of a previous ad deal, will see

ads for WorldCom’s MCI Group appearing on the America Online service, on Turner Broadcasting and

Time Inc.

However, Pittman admitted that much of the company’s cross-platform synergies currently are

being used for internal promotion. But executives said that when the ad market begins to turn

around at the end of the year, those synergies will place AOL Time Warner in good stead with

advertisers.

“In a funny way, the ad market has forced us to speed up integration … and these benefits

will be amplified in a normal ad
market,” Pittman said.

Based on those expectations of a firming ad market in late 2001, chief financial officer Mike

Kelly gave guidance of a full-year
cash earnings performance of $1.28 to $1.32 per share, or $40 billion in revenue and $11 billion

in earnings — well above analyst
consensus of $1.23 per share.

Furthermore, chief executive Gerald Levin described an effort designed to take advantage of a

coming reversal in advertising’s
fortunes. During the company’s conference call Tuesday, Levin outlined an initiative that would

begin later this year and which
would integrate broadband, wireless and mainstream Internet content with local advertising.

“We have three local zones in the company: AOL Digital City, Time Warner and Time Inc.,” Levin

said. “We’re now
integrating and selling together these local platforms, tapping into $100 billion a year market.”

Levin and other executives did not discuss the initiative in greater detail, aside to say that

it was in conjunction with the fall
rollout of version 7.0 of the America Online software.

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