Rapidly Morphing, AOL Races to Build an Ad Empire

  |  August 9, 2006   |  Comments

While AOL lays off in customer service, it bulks up in ad sales.

AOL's move to eliminate subscription fees for broadband users of its services in hopes of keeping users on its Web sites and increasing ad revenue could prove to be a boon to marketers, as long as it executes well on its plan, according to many media buyers.

"Overall, I think AOL could actually find success in its new revenue strategy. While it clearly represents a huge revenue loss up front, the company still has its content base and audience reach, which is where the value of an AOL buy lies for media buyers, and always has," Tessa Wegert, digital media strategist at Enlighten, told ClickZ.

Earlier this month, parent Time Warner announced its plan to stop charging users for the AOL software, including e-mail, security, and parental controls. AOL will continue to offer dial-up access plans, but will stop promoting the service, which has consistently lost subscribers for the past few years as more people move to broadband.

To make up for eliminating the bulk of its revenue in one fell swoop, AOL is focusing all its energy on advertising going forward. AOL made a significant move in this direction last year, when it launched the AOL.com portal in June.

"We opened up all our content to users last summer, and we've always been open to advertisers," Mike Kelly, president of AOL Media Networks, told ClickZ. "The difference now is that the entire company will be focused on advertising. That's going to yield dividends for advertisers, both in improving products and services, and in other intangible ways."

Much of the heavy lifting has already been done, from a technology and infrastructure perspective. The process of moving to an ad-supported model began more than two years ago when the company launched its Media Networks division, and acquired Advertising.com in early 2004. Around the same time, AOL eliminated its proprietary "Rainman" publishing platform in favor of a standard HTML-based one, eliminating many of the issues with planning and tracking campaigns across its properties. It also revamped its sales organization to create a more advertiser-friendly environment.

"We're not starting from scratch, obviously. We have a fully developed sales organization, and they've had a lot to sell. This will give them more inventory, more opportunity," Kelly said.

AOL has two sides of its sales group. The Advertising.com sales team has focused on performance-based advertising, while AOL's national sales team sells its brand advertising. While AOL has laid off hundreds of employees in its customer service group recently, both of those ad sales groups have been steadily hiring, and will continue to add staff, Kelly said.

One thing AOL will continue to focus on is improving the way it packages and targets inventory across its online properties, Kelly said. The company has already done extensive work in consolidating all its inventory into consistent units, so buys can be more easily made across sites.

While it has made strides in its media business, AOL always had competing priorities when it was trying to shore up its dwindling subscriber base, according to Jeff Lanctot, VP of media and general manager of aQuantive's Avenue A/Razorfish.

"As much as anything else, this move tells the media community that AOL will have a single focus on its media business, and will make investments there," Lanctot said.

AOL.com, combined with its media network sites and other Time Warner Web properties, immediately became one of the top Web portals upon its launch. AOL Media Networks sites had 112.4 million unique users in June 2005, compared to Yahoo's 119.0 million uniques across its network and MSN's 98.7 million. Those numbers remained similar in June 2006, with Yahoo at 129.4 million unique users, AOL at 112.7 million, and MSN/Windows Live at 99.9 million.

That reach, combined with AOL’s vertical properties and targeting capabilities, is a big draw in the eyes of media buyers, according to James Kiernan, associate director of digital media and innovation at Mediavest.

"AOL has the benefit of being a company built on content, where Yahoo and MSN were built on aggregating other people's content," Kiernan said. “They’re hard at work creating unique original programming, like AOL Studio 2.0, that can be housed in the context of their free sites.”

AOL will have to eat some of its words, however, since in the past its message to advertisers centered on their paid subscriber base as a differentiator, he said. "Now they need to talk about how much more valuable their content is to attract more eyeballs."

If AOL can execute its plans, there will be only upside for media buyers, according to Lanctot. So far, the signs are good, he said, with AOL.com's success proving in the eyes of many that AOL has the ability to rebrand and refocus its business.

"They've had success over the last 18 months, partly because they didn't make any huge, bold promises that would put them at risk of having a big public failure. They've worked quietly behind the scenes with media buyers to improve their service, and improve their products," Lanctot said. "There are parts of this transformation that will be necessarily public, but I hope and expect that much of the hard work will happen behind the scenes."

Over the past 18 months, AOL has shown improvements in its service, flexibility, and product offering, he said. Its incorporation of technology from Advertising.com has also brought a "culture of accountability" to AOL that was not there before, Lanctot said.

From a business perspective, the move will eliminate costs associated with trying to slow the inevitable end of a once-successful dial-up access business. By ending its marketing efforts to bring in new subscribers and scaling back customer service teams, AOL expects to save more than $1 billion by the end of next year.

In addition, by eliminating the fee to continue using AOL after switching to broadband, the company is removing "the biggest barrier to members staying with AOL," Jeff Bewkes, Time Warner's president and COO, said during the conference call announcing the move.

"AOL members are very valuable to our advertising business," Bewkes said. "Our members don't want to leave us. When they leave, the number one reason is price. Now we've fixed that problem and we're going to stop sending our members to our competitors."

Members are so important to AOL because they account for 36 percent of unique visits on AOL properties, but create 80 percent of pageviews and 80 percent of display ad revenue. And when members move to broadband, their pageviews usually double, Bewkes said.

That represents a huge potential for growth which AOL hopes to tap into by encouraging its dialup users to migrate to broadband and keep using AOL. To that end, AOL is in discussions with broadband providers to co-market the AOL service to users, and to encourage AOL dialup users to migrate to partners' broadband services. AOL is already working with Time Warner Cable to encourage dialup users in its coverage area to migrate.

In the U.S., AOL has lost 3.1 million subscribers in the past year, ending June with 17.7 million U.S. members. AOL has set aside user names for members that have left AOL in the past two years, so anyone that has left in that time can return to AOL with their old identity intact.

In addition to keeping existing users and courting past users, AOL hopes that by offering free services, it will attract new members among visitors to its Web properties, who were responsible for 12 billion pageviews to AOL.com last quarter.

AOL's dial-up past carries with it both positive and negative images for media buyers. On the positive side, what AOL has that Yahoo and MSN don't, said Wegert, is its reputation as the go-to site for media buyers looking to attract "the masses."

"For so long, the company has been known for simplifying the Internet, and that brand image won't dissipate anytime soon," Wegert said. "Even though today's masses are far more Internet-savvy than they used to be, the accessibility tied to the AOL brand will continue to resonate with consumers, and as a result, buyers will be able to expect the same mass audience reach they always have."

On the negative side, AOL has worked hard to shake the image of its user base being made up of "entry-level" users. As it has opened up more content to the Web, it has broadened its audience to include a wide array of demographic groups, interested in an array of vertical content areas.

“Perception among advertising decision-makers is still somewhat of a problem. Their ties to dial-up have not helped their image,” Michael Bailey, interactive associate media director at Omnicom’s GSD&M, told ClickZ.

One strength of the new AOL is video. It has a wide array of video content, some of which is created specifically for AOL, like its successful "AOL Sessions" live music performances. AOL is also working on "Gold Rush," an Internet-based reality show with Mark Burnett, which will launch this fall.

Other content is a result of its relationship with other Time Warner businesses, like In2TV's rebroadcast of classic Warner Bros. TV shows.

AOL began standardizing video across its sites last year, with an ad-friendly media player running on DoubleClick technology that allows AOL to show the same pre-roll and companion ads on any video clip in its network.

Its hugely successful Live8 event set the standard for what media buyers can expect from AOL in the area of online video, which should remain a priority for AOL, Bailey said. Earlier this year, it made another major move into video with the acquisition of video ad technology provider Lightningcast.

“AOL has done some good things with video, starting at Live 8. That is certainly fertile ground, so continuing to work at leading in that space makes sense. Some of their newer video offerings are compelling. We’d love to see them overlay targeting capabilities with that video and continue to bring us unique video content,” he said.


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ABOUT THE AUTHOR

Kevin Newcomb

Kevin Newcomb joined ClickZ in August 2004, covering search marketing and other online marketing topics. He has been reporting on web-based businesses since 2000.

Before the bubble burst, Kevin was a marketing manager for an online computer reseller, handling copywriting, e-mail marketing, search marketing and running the affiliate program.

With a combination of real-world marketing experience and years of business journalism, Kevin brings to ClickZ a unique ability to deliver news and training materials that help online marketers do their jobs better.

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