Why AOL's ad woes are unique

The other side of the coin is shiny...

Ongoing revenue troubles at America Online appear to reflect unique conditions within the company rather than an industry wide trend, according to analysts. AOL Time Warner on Tuesday said it expects its online division's advertising and ecommerce revenue, which largely consists of ad sales, to drop 40 to 50 per cent in 2003, following equally steep declines posted in the current year. Industry analysts said they were not surprised by AOL's announcement, given the many long-term advertising contracts it inked during the internet's salad days that are now expiring. "AOL is definitely an extreme case because they're still winding down the tail end of the big multimillion-dollar boom-time deals," said Jim Nail, a Forrester Research analyst. Indeed, online stalwarts Microsoft's MSN and Yahoo have recently painted rosy pictures of their online advertising businesses compared with the dire state of AOL's. In October, Yusuf Mehdi, the corporate vice president overseeing Microsoft's MSN division, touted advertising in a way that recalled the boosterism of 1999. He said that for the 2002 fiscal year, which ended June 30, MSN's online ad revenue grew $40m. Between 30 June and 30 September, it jumped 40 per cent. "We're on a monster roll," Mehdi said. "This is the best-kept secret in the industry, which is that the online ad industry is alive and well and actually kicking butt for a number of companies out there." For its part, Yahoo posted recent gains in online ad revenue that suggested a turnaround in the market. The company's marketing services revenue, which is mostly from online ads, rose 22 per cent year over year to $147.4m in the third quarter. Still, most of its gains were the product of a deal with pay-for-performance company Overture Services, which reigns over one of the few bright spots in web advertising. Overture charges marketers for placement in search results. More broadly, the chasm in advertising performance and predictions among the three top online properties is indicative of a landscape that remains under pressure from larger economic woes. Industry research on the growth of online advertising varies nearly as widely as dot-com earnings reports. While some industry researchers say that the net advertising market may see a slight uptick in the fourth quarter from seasonal sales, others say it will likely experience further declines based on three factors. The first is that modest cyclical growth in advertising will be sucked up by traditional media such as television, which is seen as the last bastion for marketers to reach mass audiences. Traditional marketers are also less likely to allot more money to testing internet media when budgets are tight. Finally, net companies are still trying to replace lost revenue from now-defunct businesses. As a result, net advertising revenue is expected to reach about $6bn in 2002, down from the $7.2bn in 2001 that PricewaterhouseCoopers reported in conjunction with the trade organisation Interactive Advertising Bureau. At least one forecaster predicts that the industry will fall further in 2003. Still, others estimate that web advertising will come out ahead in 2003. In a report issued this week, industry research firm eMarketer forecast slight annual growth in online ad sales to $6.7bn, up from an estimated $6.38bn this year. The company benchmarks its figures on PricewaterhouseCooper's quarterly audits and draws its future estimates based on the predictions of 16 data and research firms, including Forrester. "Online advertising is finally rebounding due to... an easing of the economic downturn and traditional advertising's better understanding of the Internet's place as part of their total advertising campaign," said David Hallerman, an eMarketer analyst. But because of AOL's ties to many long-term ad contracts that are winding down, and its failure to draw in enough new revenue to make up for the difference, the company is still under pressure. But aalysts say in the long term, AOL is best positioned for a turnaround because of its relationship with more than 34 million paying subscribers. Stefanie Olsen writes for News.com. News.com's Evan Hansen contributed to this report