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Can AOL Catch Google and Yahoo?


AOL is going to be a critical part of Time Warner's growth in the years ahead.


When I started at J. Walter Thomson in 1998, I sat down with the then world wide COO to talk about interactive advertising and JWT's position in the market. In terms of interactive, he said to me, "…this is a race for our lives. It used to be that we were looking at our competitors, running right behind them (Ogilvy, BBDO, McCann), but now they are so far in front of us that we can't even see them anymore. Your job is to get us back into that race." This is exactly what I did at JWT's digital arm until leaving the firm at the end of 2004.

In the late 1990's AOL was one of, if not THE leader in online advertising, garnering the lion's share of ad dollars being spent on line. The man leading the charge was Meyer Berlow. A hard nosed/shrewd 'player' in the media space. He was one of the first meetings I set up as the head of JWT's interactive division. I knew Myer from an earlier agency I had worked at in California, but Myer had now climbed to the top position at AOL as President for Global Marketing solutions and he could sell advertising. Most of the big fish, Unilever (UL), Proctor & Gamble (PG), all the Automotive manufacturers bought the AOL pitch, hook, line and sinker. In the post Berlow era, AOL lost its drive for the advertising and focused on subscriber growth – does anyone remember the CDs they'd receive in their newspaper offering "25 Hours of AOL FREE!" If I had a nickel for each of those CDs I'd be retired today!

AOL is betting on advertising once again, which begs the question: is it too late to the game? It has announced that it is going to shift many services to a free content model. AOL may be late, but I don't think it's out. AOL is shifting focus from being the distribution channel to being the content provider. Furthermore, it is recognizing that to be a content provider, and to be profitable, it must have a greater share of the ad pool.

To help add context to this move, I've referenced some older research compiled by Michael Tchong. In 2001 he put together one of the most useful printed pieces on media I've ever seen called the "Iconomap." (You can find more of Michael's work at

  • 1967: NAB survey finds public dissatisfaction with TV; 63% prefer TV without commercials.
  • 1973: By a margin of 5:1 Americans say TV ads are "a fair price to pay for being able to view programs."

It took about six years for consumers to finally realize that there was a value exchange, meaning I had to give something to get something. In this instance you have to watch commercials to get free programs. Sure you can still get free TV. You can also subscribe to commercial free television, but looking more closely at the AOL shift, seems to hearken back to a very familiar model: cable. According to Kagan research, over 60% of all US households SUBSCRIBE to cable. I use the word 'subscribe" because it's still relevant. People are willing to pay for a better connection, more channels, services or a more dynamic experience. It is at the crossroads of cable and dial-up where AOL's panacea resides. For all intents and purposes, let's call it…broadband! Eureka!

The days of free content started again in the internet boom, but at the same time, content never became a true commodity. Good entertaining content and experiences will always sell at a premium.

The market is still shaping up, but AOL's shift in strategy is a nod to the days of old, where ad supported content reigned supreme. In many ways, AOL is to the internet ad space as JWT was to the ad industry. Today, AOL is looking at mere dots off in the distance, names like Yahoo! (YHOO) and Google (GOOG), who are so far ahead that AOL can barely see them. That doesn't mean AOL can't catch them as I did at JWT after five years of incredibly hard work. But it means there has to be a major shift in strategy if AOL wants to catch up to Yahoo!, Google and even MSN.

According to the Interactive Advertising Bureau and Price Waterhouse Coopers, online advertising in Q1 reached $3.9BB. Digging a little deeper, here's what I could find from the 10K filings of the top four. These were categorized under "Advertising, Marketing Services and the total revenue of MSN."

  • Google Q1 $2.25B (Advertising)
  • Yahoo Q1 $1.3B (Marketing Services)
  • MSN Q1 $561M (Total revenue)
  • AOL Q1 $311.1M (Advertising) (Note: total Advertising revenues for Time Warner (TWX)are $1.76B)

Once again, AOL (Or better yet, with significant support from Time Warner) can catch up. The only way it will do this is if it crosses leverage of the assets of Time Warner and delivers on the original vision of the AOL/Time Warner merger.

The Transformation

AOL has a hybrid business model. The majority of its business is subscriptions ($2.1B in revenue) and ad revs are gravy – albeit $311M in gravy – that's good gravy! But it still pales in comparison to $1.3B and $2.25B for their competitors. AOL is finally seeing that subscription services and advertising revenues need to be on a more level playing field. In the past year, AOL has lost 16% of their subscriber base or 3.1MM subscribers. At the same time, their cable business has seen a 16% increase in subscription revenues. (All these details are outlined in the 10K filings here). As Time Warner and AOL become one, I believe we'll see these numbers level out. As more integrated services permeate the Time Warner business model, AOL's ability to provide experiences like Instant Message (THE killer app), email and other content will become more and more important to the business and more prevalent. Think IM through the cable channel. Time Warner has the distribution mechanism to take AOL's assets and push them to any device.

I was once in a meeting with my clients from Merrill Lynch (MER) and the newly installed leadership team of TWAOL. The purpose of the meeting was to talk about how they would leverage their content across this vast network of platforms – Web, cable, print, etc. After putting a chart on the wall with every logo of every TWAOL property they said, "Look…integration!" We all stared blankly as no process was in place to pull these disparate entities together. No strategy to unite disparate business units to help marketers connect with their audience. It's only until the market turns down and people start questioning the acquisition and lack of integration strategy for key assets (like Ichan recently did with Parsons when he called for a spin off of AOL ) . NOT a good idea.

This integration will be a critical part of Time Warner's growth in the years ahead. From a marketer's perspective, Time Warner knows three things:

1) It knows how to create compelling content. (Think HBO.)

2) It knows the power of the advertising dollar (and for AOL it seems like it has put process in place to capture those dollars), it had a 26% increase in Ad revenues for the quarter.

3) It knows how to distribute content. So shifting to an ad supported model for AOL content is a smart, long term strategic move.

Now it comes down to Time Warner's ability to execute the sale and garner a greater share of the roughly $16B+ that will be spent this year on online advertising. Google and Yahoo! might be way out in front of AOL, but AOL is still running on flat ground while Yahoo! and Google are just starting to hit an uphill slope after tremendous growth.

If AOL can get consensus from management and the support of the Time Warner organization across the board, Yahoo!, Google and MSN should look in the side view mirror and heed the warning "objects may appear closer than they look."

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