AOL's advertising growth slows: Blame the enhancements?

Time Warner reported earnings on Wednesday and gave some color on its AOL unit. Advertising growth for AOL was 16 percent in the second quarter.

Time Warner reported earnings on Wednesday and gave some color on its AOL unit.

Advertising growth for AOL was 16 percent in the second quarter. That growth isn't bad, but compared to the 40 percent growth in the prior quarter it looks a bit worrisome.

On the earnings conference call, Time Warner CEO Richard Parsons had some interesting reasons for the "significant slowdown."

First, Parsons noted that AOL signed some big ad deals last year that made for some tough comparisons once they passed the anniversary date.

Fair enough.

Here's the part that makes me go hmm.

In the quarter, AOL made significant programming enhancements to many of its main channels, including health, music and autos, as well as improvements to such core products as email and search. All of these changes are aimed at building user engagement and ultimately driving increased monetization, and in the main, AOL management team has been satisfied with the early results.

That said, these kinds of up grades often lead -- at the beginning -- to a slowing in traffic and monetization. When you modify programming for example, uses 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. In other words, improvements like these to AOL’s programming and products which we’re confidence will yield long term benefits comes with short term disruptions.

On the surface, Parsons reasoning sounds plausible, but were the changes really that disruptive?

Later in the call chief operating officer Jeff Bewkes elaborated a bit. Search monetization was down because AOL "decluttered the search product to try to make it more attractive and drive higher engagement." Bewkes maintains that monetization levels have returned to pre-tweak levels.

Parson's final point on the slowdown is likely the most logical.

We’ve seen advertising demand shift recently toward third-party advertising networks. This puts some pressure on AOL’s display advertising in the quarter. AOL’s well-positioned to compete in this changing dynamic with, a major force among third party advertising networks.

The bottom line for AOL:

"We’re stepping back from our expectation that AOL will grow its advertising at or above the domestic industry growth rate this year," says Parsons.

Add all this up and you get a few disconnects. AOL's outlook was cut, but traffic and monetization levels have returned to normal levels. So why cut back on AOL’s outlook? Analysts also apparently see the disconnects--the questions on AOL were plentiful given Time Warner's other businesses.



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