AOL trouble called Microsoft lesson

Integration of acquisitions vital

Associated Press

May 1, 2008

NEW YORK - AOL made key mistakes that pushed down display-advertising sales and resulted in the Time Warner Inc. unit's first quarter of flat ad revenue since it began staking its future on the boom in online ads, executives said yesterday.

AOL's troubles integrating $1 billion worth of corporate acquisitions into a single "Platform-A" should serve as a warning for Microsoft Corp. as it pursues an unsolicited bid for Yahoo Inc. now worth more than $40 billion.

"If Microsoft does buy Yahoo, a much larger company to digest [than the ones AOL has acquired], it will be many quarters" before the units operate tightly, said David Hallerman, a senior analyst with the research group eMarketer. "It's so hard to make that kind of change, to really integrate, when there have been all these silos."

Overall, AOL revenue fell 23 percent in the three months that ended March 31, compared with the first three months of 2007, according to Time Warner. With advertising making up only half of AOL's revenue, the 1 percent growth in advertising was not enough to offset the 38 percent plunge in subscriptions.

Time Warner, meanwhile, reported a 36 percent decline in first-quarter earnings from a year ago, when it had a gain from the sale of AOL's Internet access business in Germany. The results were mainly in line with expectations.

The 1 percent increase in advertising at AOL also was low compared with its rivals. During the first quarter, Google Inc. saw a 40 percent increase in online ads, Microsoft a 39 percent jump and Yahoo 7 percent.

The company suffered from the loss of an exclusive partnership with a major advertising customer.

And even as AOL set audience records in March, display advertising on AOL-owned sites - historically its revenue staple apart from its plummeting Internet access business - declined 18 percent.

Time Warner blamed challenges merging Tacoda, Quigo and other acquisitions with its long-standing Advertising.com business.

"We didn't integrate our Platform-A acquisitions fast enough," said Jeff Bewkes, Time Warner's chief executive. "That created a sales channel conflict."

In recent weeks, AOL has extended Tacoda's ad-targeting technologies across its entire platform, introduced more automated tools for advertisers and partner Web sites, and reorganized its ad sales teams. AOL elevated Advertising.com President Lynda Clarizio in March to run the entire Platform-A business, ousting Tacoda's former chief.

Bewkes said the changes should allow advertisers for the first time to buy ads on both AOL and partner sites at once, an option long available elsewhere.

"We're executing these changes now, so we don't expect to see the full benefits in the current quarter, but we're optimistic that this dislocation is largely behind us," Bewkes said during a conference call yesterday.

AOL embarked in late 2004 on an ad-focused strategy, making most of its news articles, music videos and other features available free through ad-supported Web sites rather than exclusively to subscribers paying for AOL's Internet access service. It accelerated the shift in 2006 when it gave away AOL.com e-mail accounts and software. As expected, Internet access subscriptions have continued to decline - to 8.7 million as of March 31, down from a U.S. peak of nearly 27 million in September 2002. But the quarter's 6 percent drop in subscribers was the smallest under the accelerated strategy, according to Associated Press calculations.

Bewkes said Time Warner expects to finish separating AOL's advertising and access operations by June, allowing the parent "to enhance our strategic flexibility." Although Bewkes did not elaborate, options include selling one or both businesses, most likely the access side first.

The first quarter saw the loss of an exclusive partnership with Apollo Group Inc., which owns for-profit University of Phoenix.

Although Apollo continues to buy ads, AOL lost $39 million in the quarter with the termination of exclusivity, more than offsetting a growth of $36 million in ads run on AOL's network of third-party sites. That means the 25 percent growth in third-party ads mostly resulted from company acquisitions, which contributed $41 million in revenues.

Hallerman, the eMarketer analyst, described Apollo's influence as a classic case of "having so many eggs in one basket," but said AOL should be able to withstand the decline as it continues emphasizing ad networks and the diversity of customers they can attract.

AOL also was helped by its minority owner, Google, which has been generating higher revenues by emphasizing quality over volume.