Thursday, November 6, 2008

AOL advertising revenue falls while Google gains

AOL suffered another setback in its bid to become an advertising-focused company as online ad revenue dropped 6 percent during the third
quarter, while its chief rivals saw gains despite a weak economy.

The $33 million decline compared with the year-ago period, disclosed as parent company Time Warner Inc. released its earnings report on Wednesday, marked AOL's first drop since it began distancing itself in late 2004 from its roots as an Internet access provider. Ad revenue grew 41 percent in 2006 and 18 percent in 2007 and was flat the first half of 2008.

Google Inc earlier reported a 28 percent third-quarter gain in online advertising revenue, while Microsoft Corp saw a 15 percent jump. Even the struggling Yahoo Inc. had a small increase of 1.2 percent.

During a conference call, Time Warner executives said the $33 million decline reflected the loss of an exclusive partnership with Apollo Group Inc, which owns the for-profit University of Phoenix. Revenue from Apollo alone was down $55 million, offset by $29 million in gains from acquisitions.

The company also blamed general declines in online display advertising, something much of the industry has seen because of the economy. Time Warner had expected to begin seeing benefits in the third quarter from new technologies and a reorganization earlier this year to address missteps integrating $1 billion worth of corporate acquisitions into a single ``Platform-A.''

Analysts say it was too early to assess whether integration has succeeded. Chuck Richard, an analyst with Outsell Inc., said the Apollo loss ``masks any ability to make a strong judgment about ongoing stability or growth trends.''

Dave Hallerman, senior analyst at eMarketer, said Time Warner executives ``blamed Apollo in the last report and the one before that as well. Maybe it's true, but it's a theme.'' Company officials suggested the Apollo loss will weigh down revenue in the fourth quarter and, to a lesser degree, the first quarter of next year as well.

"The most significant year-over-year drag that it's going to have in the growth rates is really going to be in the fourth quarter," said John Martin, Time Warner's chief financial officer. "We did have some Apollo money in the first quarter of this year. But the numbers trail off pretty materially."

That means that starting in the second quarter of next year, AOL won't be comparing revenue with a year-ago period flush with Apollo dollars. AOL lost 634,000 Internet-access subscribers during the quarter, ending with 7.5 million, 72 percent fewer than the 26.7 million it had at its peak six years ago.

AOL's dial-up subscribers have been shifting to competing high-speed services, and the decline in paying subscribers has accelerated since AOL in 2006 began giving away features it once reserved for paying subscribers to boost its ad-supported Web sites.

Time Warner is working to split AOL's access and advertising businesses operationally by next year, a move that would make it easier to sell off one or both.

The company has been in continual discussions with both Yahoo and Microsoft over AOL's Web sites and ad operations, while rival access provider EarthLink Inc. is seen as a leading candidate for the remainder of AOL.

Time Warner CEO Jeffrey Bewkes declined comment on specific discussions but said the company was open to any "strategic opportunity to put AOL in a stronger position."

Referring to Wednesday's announcement that Google had pulled the plug on an advertising partnership with Yahoo in the face of antitrust concerns, Bewkes said: "the opportunities or possibilities remain open for this whole business to restructure itself."

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