What slowdown? AOL partnerships still going strong

AOL Time Warner recently landed eight advertising contracts which are reportedly worth an extra $100 million in revenue this year. How did AOL do it? Primarily, with a little help from its friends.

Advertising isn't just in a slump, it's in the dumps. Many media firms are reporting notable downturns in ad spending this quarter.

Yet, during the past three months, media giant AOL Time Warner Inc. has landed eight advertising contracts that people familiar with the situation say are worth an extra $100 million in revenue this year.

How did AOL do it? Primarily, with a little help from its friends. Many of the recent deals, the result of an initiative by AOL Co-Chief Operating Officer Robert Pittman, are packages of Internet, magazine and TV advertising that piggy-back off relationships AOL already has with suppliers and companies in which it owns a stake.

AOL's advertising deal with Foundry Networks Inc., a company that makes Internet hardware, is one example. AOL is one of Foundry's biggest longtime customers. In March, Foundry announced it would launch its first-ever mainstream advertising campaign, a "multiyear, multimillion dollar" effort that would run on AOL's Internet, magazine and possibly TV properties. Prior to this announcement, Foundry had only advertised in industry trade magazines. "We want to really build our brand," says Ken Cheng, vice president of marketing for Foundry.

Some observers see AOL's strategy of reaching out to business partners such as Foundry as smart business, particularly in these difficult times. But others question just how valuable such arrangements are for the newly merged company over the long term and whether they can be replicated in years to come.

"If you want to trumpet something, please don't make it from someone from whom you buy hundreds of millions of dollars of equipment," says John Corcoran, an analyst at CIBC World Markets. He calls the Foundry deal basically "a rebate."

Myer Berlow, president of interactive marketing at AOL's America Online unit, disagrees, saying the Foundry arrangement doesn't constitute a rebate. He says it makes perfect sense for AOL to leverage its relationships. "We have always been firm believers in doing business as much as we can with our partners," Berlow says. "If you can't do business with your partners, then what's wrong with you?"

Leveraging relationships, making deals
Indeed, rivals may eventually follow AOL's lead. "To date, we haven't made [suppliers] part of the equation. But it's absolutely a possibility in the future," says Lisa McCarthy, senior vice president of Viacom Plus, Viacom Inc.'s integrated sales and marketing unit. Already, Viacom Inc. has turned some of its Internet investments into advertisers.

AOL's marketing deals are conceived at biweekly meetings of the AOL Ad Council where executives brainstorm ways to combine their Internet, magazine, cable and TV properties into custom advertising packages for big advertisers. Pittman has touted the effort as one important way that AOL is learning to cooperate among divisions and to leverage existing relationships to bring in additional revenue.

So far, eight deals have been announced from the Ad Council's deliberations. Three of them involve technology suppliers to AOL and three others involve companies with equity relationships with AOL or its executives. The two other advertisers are Continental Airlines, which renewed its existing deal with America Online and agreed to buy two 12-page advertising spreads in AOL's ON magazine, and Princess Cruises.

Princess Cruises said it was lured, in part, by the prospect of a discount deal. "They are getting increased revenues from us and we're getting better rates from them," says Todd Putman, vice president of marketing at Princess Cruises, a subsidiary of P&O Princess Cruises PLC. The company said in March that it would expand its advertising with America Online into a "multimillion dollar" deal across several AOL properties. As part of the deal, Princess will also promote AOL's service; details will be announced later this month. "There is money going both ways, yes," Putman says.

Money is also apparently flowing both ways between AOL and Compaq Computer Corp. AOL is the largest purchaser of Compaq's top-of-the-line Himalaya servers and AOL also pays to make its service available on the Compaq Presario line of computers.

Compaq declines to comment on the details of its "multiyear, multifaceted" marketing agreement with AOL that was announced on Jan. 31, saying details will be announced later this month. "The announcement is pretty significant, in terms of them purchasing our technology and us putting more and more of our marketing and advertising dollars into the AOL Time Warner franchise," Compaq spokesman Arch Currid says.

Another supplier that AOL has tapped is Nortel Networks Corp., which makes telephones and other voice technology. "AOL sat down with Nortel and said, 'Yes, we want to do some things with you in the voice technology area, but let's look at the total picture across all our properties,' " AOL's Berlow says.

The advertising package that emerged in January: Nortel said it would "expand" its advertising on CNN and Time and Fortune magazines while AOL would collaborate with Nortel to expand its AOLbyPhone service. With Nortel, as with its other partners, AOL declines to specify exactly how much incremental revenue the company will make off each deal.

Some of AOL's new advertisers are also found among AOL's portfolio of investments, such as Internet startup PurchasePro.com Inc., in which AOL has warrants to purchase two million shares. In January, PurchasePro said it would begin advertising on AOL's magazine and cable TV properties.

Another investor on AOL's roster of advertisers is Kinko's Inc. Although it hasn't been disclosed previously, AOL also purchased a stake in closely held Kinko's last year. Kinko's confirmed the stake but declined to elaborate upon its size; according to shareholder documents, America Online owned 11.5% of Kinko's as of Sept. 30. In March, Kinko's said it would expand its advertising on AOL properties.

Tom Wolzien, an analyst with Sanford C. Bernstein & Co., says that kind of arrangement raises questions about whether Kinko's is using the money it raised from AOL to increase its ad spending. "Is it just circular?" he says. "The reality is, we won't know for a couple of quarters."

AOL says its investments have no bearing on the advertising relationship. "I don't keep track of that," Berlow says. "This is strictly for me a business, advertising, e-commerce relationship."

But Berlow says it makes sense to take advantage of other connections. For example, Pittman, before joining AOL, was the chief executive of Century 21 Real Estate Corp., a unit of Cendant Corp. He is also still a director and shareholder. In January, Cendant announced it would "expand advertising" for its brands on AOL Time Warner properties.

"Nothing would make me happier than if [Pittman] were on 10 boards," AOL's Berlow says. "It's smart business to use personal relationships like that to drive business."