Earnings Pain: Why AOL Ad Growth Just Hit a Wall

AOL’s speeding motorcycle of ad revenue growth evidently left the freeway and entered a school zone in Q2, forcing it to slow from the 40 percent growth it accomplished last quarter to just 16 percent.

Time Warner CEO Dick Parsons blamed the disaster on the passing of anniversaries for major ad deals it struck last year and on user and advertiser disorientation over programming changes and core product enhancements. “These kinds of upgrades often lead, at the beginning, to a slowing in traffic and monetization,” he said, trying to explain how site improvements could actually hurt the business. “Users routinely require a little time to become accustomed to the redesigned pages while advertisers naturally want to see how the new programming performs before reinvesting significantly.”

Parsons then uttered the major bummer that the company is “stepping back from our expectation that AOL will grow its advertising at or above the domestic industry growth rate this year.”

Other highlights:
-Revenue at Advertising.com grew 32 percent during the quarter, much faster than AOL proper.
-E-mail was up 27 percent for the quarter and now accounts for 43 percent of page views, while search stagnated with only 6 percent growth, chalked up to subscriber attrition.
-Traffic: TW claims AOL now has 21.4 million total users, of which 10.5 million are free users.
-Time Warner also talked about plans to integrate recently acquired ad technology products, on which it’s spending an aggregate $0.5 billion. These include Adtech, Tacoda, LightningCast and Third Screen Media, and you can bet Tacoda will be integrated with Advertising.com.

So, expiring ad deals and harmful “enhancements” put a big drag on a company that by all accounts should’ve continued growing like gangbusters into Q3 — the one-year anniversary of its launch as an open, ad-supported site. Meanwhile AOL is turning into an e-mail machine, with nearly half its inventory generated through that notoriously hard to monetize application.

Bad signs all around. The only real bright spot here is Advertising.com, which we hear is on track to bring in $1 billion in revenue this year.

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