Interactive Ads Emerge as AOL-TW's Secret Weapon

By Erin Joyce

Subscription growth is the driver of AOL Time Warner’s third quarter revenues of $9.3 billion, but interactive advertising and marketing on its flagship ISP turned out to be the company’s secret weapon — the main driver of that subscription growth.

During a conference call to discuss its third quarter results Wednesday, AOL Time Warner officials said advertising on AOL helped boost new high speed cable modem subscriptions by 15 percent during the period, the same way AOL helped drive new magazine subscriptions in prior campaigns.

“We are now using America Online as the most effective medium to sell almost all of the Time Warner products and services,” Chief Executive Gerald Levin told analysts.

“This not only relates to home subscriptions but on the entertainment side where it is driving services [and] increased advertising.”

At $4.2 billion for the quarter, subscriptions remain the biggest portion (45 percent) of AOL Time Warner’s third quarter sales, which were up by 6 percent over its $8.8 billion estimated sales in the same year-ago quarter (before the merger of the two companies was complete).

Content revenue and other licensing-related sales of $3.2 billion are the next biggest portion at 34 percent and advertising and commerce revenues round out the balance at $1.9 billion, or 21 percent.

Not surprisingly, those overall advertising and commerce revenues were down by 5 percent from the same time last year, reflecting the tough climate for advertising deals. But the AOL division took in $624 million, up 5 percent from last year, which was helped by a 7 percent increase in advertising.

Helping to drive that increase was AOL Time Warner itself, which has become the second largest advertiser on its own property.

“We wouldn’t do that if we didn’t think it was the probably one of the most efficient distribution mediums we have seen,” Levin said.

AOL Time Warner’s net loss was $996 million, or 22 cents per share, largely driven by merger-related costs and investment write-downs.

The results were slightly wider than the net loss of $902 million, or 21 cents per share of a year ago.

Also affecting the bottom line, of course, was a soft advertising market that has been a problem for media companies all year. Since Sept. 11, the ad market has further deteriorated, Chief Financial Officer Mike Kelly explained, saying that the situation is impacting its network, publishing, cable and AOL operations.

As interactive advertising dollars became tougher to come by after major advertisers cut their budgets — especially their interactive budgets — the strategy became to use the inventory to help sell its own brands.

“We see the results in that, not only in subscription growth and revenue, but in the thing that counts the most, usage,” Levin said.

Using AOL, Time Warner Cable digital division added 350,000 new subscribers to number 2.9 million overall and its Road Runner cable modem group added 252,000 new subscribers, bringing that group’s number to 1.7 million, a growth of over 100 percent for both divisions.

Levin said the company is building on its use of cross-promotions to help sell advertising through its newly formed Global Marketing Solutions Group.

At a time when normal ad deals are difficult to get done, he said the unit signed 22 cross platform promotion deals worth $700 million during the third quarter. The cross-platform deals are with advertisers that include Toyota, Bank of America, and WorldCom.

Kelly declined to give any guidance for the fourth quarter advertising outlook beyond his view that it remains very weak across all of the properties.

He expects ad revenues to represent at best an increase of 5 to 7 percent of the company’s total revenue growth by the end of the fourth quarter.

Fourth quarter marketing costs are likely to increase in its AOL unit as well, Kelly added, as the company looks to drive more new subscribers during the holidays and winter months when people are more likely to use the ISP service.

Beyond the diversified revenue streams that drive AOL Time Warner, Kelly said the subscription business continued to experience the strongest growth.