AOL's ad sales growth disappoints again

by Juan Carlos Peréz

November 7, 2007 —

AOL's online ad revenue grew at a much slower pace than the market average
in the third quarter, a development likely to fuel skepticism over its ability
to build a robust advertising business.

In the third quarter, which ended Sept. 30, AOL grew its online ad revenue
just 13 percent compared with the same quarter last year, parent company Time
Warner said Wednesday.

By comparison, Google's revenue, which is almost totally made up of online
ad sales, grew 57 percent in its third quarter, also ended Sept. 30.

It is the second straight quarter of disappointing online ad growth for AOL,
which is in a transition from a business model based on Internet access subscription
fees to one focused on online advertising.

AOL's online ad revenue growth in the second quarter was 16 percent, well below
the 26 percent growth of the U.S. online ad spending that quarter.

Last month, AOL began the process of laying off about 2,000 employees, or approximately
20 percent of its staff, in order to shift budget dollars from the ISP (Internet
service provider) business to the advertising team.

AOL's weak advertising growth will also likely increase the pressure on CEO
Randy Falco, who was hired a year ago and under whose watch the ad revenue has
wilted.

In a memo announcing the layoffs last month, Falco wrote: "So where is
this taking AOL? Put simply, my vision for AOL is to build the largest and most
sophisticated global advertising network while we grow the size and engagement
of our worldwide audience."

"We're now in a position to win as an advertising-supported business.
We have a bright future as a company if we can execute on this vision,"
Falco wrote.

The key word in Falco's memo: "if".

Falco's appointment last November perplexed some industry watchers, because
to bring him on board Time Warner fired Jonathan Miller, who engineered the
AOL business transformation and had earned praise for its early results.

In last year's third quarter, the last full one under Miller's lead, AOL's
ad revenue grew 46 percent. For the 2006 fiscal year, AOL had ad revenue growth
of 41 percent, faster than the 35 percent growth of the overall U.S. online
ad market.

Miller, AOL's CEO since August 2002, also had significantly more experience
in the Internet market than Falco, a TV industry veteran who, prior to joining
AOL, had been president and chief operating officer of the NBC Universal Television
Group.

Despite the struggles, AOL continues pushing ahead with its transition, announcing
Wednesday that it has entered into an agreement to acquire Quigo, whose contextual
advertising technology matches ads to Web page contents. Although financial
terms weren't disclosed, a source told IDG News Service that the price is about
US$340 million.

Quigo, founded in 2000 and based in New York, is the fourth Internet advertising
company AOL will buy this year. When the deal is finalized, Quigo, which has
about 100 staffers, will join Platform A, AOL's new umbrella group for advertising
programs and services.

AOL's overall third-quarter revenue fell 38 percent to $1.2 billion, as AOL
continues phasing out its ISP business, whose revenue fell 56 percent. As of
Sept. 30, AOL had 10.1 million ISP subscribers, down by 5.1 million from last
year's third quarter.

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