Hearts and Minds: AOL's Agency Problem

While AOL tried to win back the hearts of fans with a free Dave Matthews Band concert in New York’s Central Park Wednesday night, the Internet service has waged a quieter, yet equally important battle behind the scenes to win back the respect of agencies.

Two weeks ago, in her first public comments since she took over AOL’s advertising division, Lisa Brown issued an apology to agencies.

“In many ways, we were on the road to perdition with agencies and advertisers,” she said. “Now we’re on the road to redemption.”

Dot-Com Fallout

Like many conversions, AOL’s came only when it hit rock bottom. The company is about to see the last of its long-term ad deals expire. Those agreements, signed during the dot-com boom and AOL’s heyday, were the source of many of AOL’s subsequent troubles. For the year, ad revenue is expected to be down 35 percent due to the deals’ expiration.

For the most part, the deals were unsustainable. According to Mark Redetzke, vice president of online media with Zentropy Partners, AOL was charging CPM rates that were seven times the going rate. Even after the dot-com bubble burst, he said, AOL’s ad team had difficulty adjusting to the new reality.

“It took quite a learning period for them to understand what the market conditions really were,” he said.

AOL developed a bad reputation with agencies for cutting them out of deals, going straight to the client instead. While AOL could do this in its salad days, the end of the boom left it without such clout.

“They’ve clearly come around to recognize the importance of the agency channel,” he said, “where before it was blatant disregard for the media buyer.”

Redetzke, who negotiates ad deals for General Mills, said the consumer packaged goods manufacturer had one of those long-term, unsustainable ad deals. The two-year deal recently expired, and Redetzke declined to renew it. Instead, he will evaluate AOL on a case-by-case, RFP-by-RFP basis — just like any other Internet outlet.

“They’ve got to fight for their dollars the same way that everybody else has to, maybe even harder,” Redetzke said.

The Proof in the Pudding

AOL hopes the secret to success lies in its upgrade to 9.0 Optimized, launched this week with much flashy fanfare. The new version is aimed at holding onto subscribers — and luring new advertisers.

Nick Pahade, vice president and managing director of Beyond Interactive in New York, said AOL 9.0 boasts a number of advertiser-friendly innovations that will go a long way to repairing any breach. For example, AOL has cut down on the number of ad units it offers, and by the end of the year will offer all four of the standard sizes recommended by the Interactive Advertising Bureau. Also, AOL has greatly improved its rich media capabilities, now taking ads from vendors like Eyeblaster and Bluestreak, in addition to Viewpoint.

“Overall, we’re pretty pleased with 9.0 and the way they’ve positioned themselves in the marketplace,” said Pahade, whose company represents AOL sister company Warner Bros. “The product itself has a variety of additional capabilities that make them competitive to others and offer additional features that make them better.”

Brown said AOL would continue to work on winning back advertisers with results, not promises. One of the advances in the works: more targeting and segmenting options for reaching specific demographics. AOL has a Hispanic-focused service, AOL Latino, and plans to reach a children’s version, KOL, and a teen-focused service, Red.

“As AOL thinks more about how to segment their user base, we’re excited about it,” said Jeff Lanctot, vice president for media at Avenue A. “But they are behind Yahoo and MSN in their targeting and segmenting ability today.”

More Work to Do

Redetzke agreed that broadband-focused AOL 9.0 makes big strides, although it does not cover all of AOL’s weak spots. For example, Redetze said AOL’s major Achilles heel is that it has a broadband service that is not like to be used during work hours, which has become the Internet’s “primetime.” A campaign looking to reach working women during the day would probably not include AOL, he said.

“It’s a massive barrier,” he said. “The majority of broadband page views occur during the workday.”

Another problem is that AOL continues to shed subscribers, although it’s hoping 9.0 will change that. Last quarter, AOL lost 846,000 subscribers, bringing its membership base down to 25.3 million. With a shrunken audience, AOL’s biggest selling point — its massive reach — becomes less persuasive.

“They still represent a vast portion of the population,” Pahade pointed out. “When we evaluate media, we take in all the different factors that make one outlet better than the other.”

When Brown issued her apology, she said the company had no one to blame but itself. In the future, she said AOL should be judged on how it delivers, not what it promises.

“The biggest thing is that while I’ve been impressed with Lisa Brown, frankly it’s things we heard from AOL before,” said Lanctot. “It’s the same tired song sung in a different tune.”

Some progress is evident. AOL expanded on last year’s mini-upfront for the entertainment industry with a broader one last week. Meanwhile, the Internet service’s ad business has shown signs of perking up. In the second quarter, it began to stabilize, and the company expects to sell more advertising this year than last.

“They have their unique strengths and they have their unique weaknesses,” Redetzke said.