AOL Sees Ad Growth, Subscriber Decline

America Online’s revenue in 2004 rose a modest 1 percent to $8.7 billion, the company reported today. AOL subscription revenues dropped by $116 million, a 2 percent decline. This was offset by a $220 million, or 28 percent, increase in advertising revenues to bring total ad revenues to just over $1 billion for the year.

Similar growth was seen across parent Time Warner’s cable, film, networks and publishing segments, bringing the company’s total yearly revenue to $42.1 billion, up from $39.5 billion in 2003.

AOL’s ad growth was fueled by a $102 million, or 51 percent, increase in domestic paid search revenue and a $33 million increase from AOL Europe. Revenues resulting from the August acquisition of added another $97 million for the year.

“2004 was the year the company settled down, put the past behind it, got focused on its businesses and turned in a solid performance,” said Dick Parsons, Time Warner chairman and CEO

At the end of 2004, AOL had 22.2 million U.S. members for its subscription service, down 464,000 from the prior quarter and 2.0 million from the end of 2003. In Europe, the AOL service gained 49,000 members to reach 6.3 million at the end of 2004.

AOL is in the midst of a shift away from its historical business of providing dial-up access, and toward its “bring your own access” plans that layer its content, services and ads on top of another provider’s broadband access service. The move makes it easier for AOL to take advantage of “strategic adjacencies,” like the joint offering just announced between AOL and Time Warner Cable. Under that agreement, AOL will provide advertising and content, while Time Warner Cable will provide the broadband access. In the past, issues of who would provide access kept an agreement from happening.

AOL benefits by migrating its narrowband customers to broadband, and by gaining access to Time Warner Cable’s customers for advertising and selling premium services. Time Warner Cable benefits by gaining access to AOL’s 3 million dial-up customers in its service footprint, and the increased advertising that AOL will be able to sell on its properties.

Cooperation between the two Time Warner divisions will also lay the groundwork for future deals between AOL and broadband providers in the 85 percent of the country that Time Warner Cable does not serve.

A major milestone for the company came in December, when it resolved a Department of Justice (DOJ) probe into potential securities fraud by employees of AOL regarding the way advertising deals were accounted for. Under the agreement, Time Warner has agreed to pay a penalty of $60 million and has established a $150 million fund to settle related securities litigation. An independent monitor will be appointed to review new internal controls.

A similar investigation by the Securities and Exchange Commission (SEC) is reportedly close to resolution, with the framework for a deal in place that would have Time Warner paying a $300 million penalty. The company will also be required to adjust its historical accounting of approximately $489 million in advertising revenues between 2000 and 2003.

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