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Unconventional Transactions Boosted Sales

In another internal document, AOL stated that BigEdge.com, an online sporting goods retailer, "Demanded restructuring conversation with 3 options (including terminating deal outright)."

AOL figured its upcoming payment of $500,000 "may be in jeopardy."

AOL Time Warner directors are scheduled to approve the name change at a meeting on Thursday in New York, according to people close to the board. (File Photo - Associated Press)

_____AOL Responds_____
AOL Says Accounting 'Was Appropriate' (The Washington Post, Jul 18, 2002)
_____AOL Series_____
Part II: Creative Transactions Earned Team Rewards (July 19, 2002)
Sidebar: Unorthodox Partnership Produced Financial Gains (July 19, 2002)
_____Graphics_____
The Heart of a Deal: How America Online Brings Advertising Deals to Fruition
Excerpt of AOL E-mail
A Rocky Road: Graphical Timeline Tracks AOL Stock Price
AOL Documents and Deals Reviewed by The Washington Post
_____Time Warner_____
Stock Quote and News
Historical Chart
Company Description
Analyst Ratings
Timeline: Time Warner Highlights
Company Downsizing Actions
_____Time Warner News_____
Former AOL Chairman Heads Luxury Travel Firm (The Washington Post, Nov 23, 2004)
Time Warner Nears Deal Over AOL Accounting (The Washington Post, Nov 23, 2004)
AOL Concentrates On Security Issues With New Software (The Washington Post, Nov 18, 2004)
More AOL Time Warner News

BigEdge.com was a part of MVP.com, another struggling firm whose domain name, trademark and certain assets were sold off to SportsLine.com in January 2001.

There were dozens of other shaky deals of various sizes. They added up. AOL faced the risk of losing $23.2 million in revenue in the quarter ended Sept. 30, 2000, according to an internal company memo summarizing the situation.

Early Warnings

In September, other internal company documents obtained by The Post said that AOL was "at risk" to lose more than $108 million in ad revenue in fiscal 2001, from July 2000 to June 2001, with most of that jeopardized revenue coming from dot-coms. In early October, O'Connor, the AOL advertising executive, said he briefed Pittman and other company executives about the weakness of AOL's dot-com advertisers two weeks before Pittman's October 2000 comments. O'Connor said he told them that the company risked losing more than $140 million in ad revenue in calendar year 2001.

AOL said that just because ad revenue was identified as "at risk" did not necessarily mean the company would fail to collect it. Yannucci, AOL's attorney, did not respond to The Post's question about how much dot-com revenue was lost in that period. He wrote that "one would hope" O'Connor's estimate was "a worst-case assessment."

Cox, the Duke professor, said he believed that AOL should have been more forthcoming about the dot-com restructurings. It appears that a significant part of AOL's ad business was in jeopardy and it should have said so publicly, Cox said. "They have an obligation to disclose what is happening to the present client base," he said.

AOL said it had no obligation to make such disclosures, asserting the amounts were too small. "It should be beyond reasonable dispute that these amounts do not remotely represent a material percentage of AOL's advertising and commerce revenues for these quarters," AOL's attorney wrote.

But Doug Carmichael, a professor of accounting and director of the Center for Integrity in Financial Reporting at the City University of New York's Baruch College, disagreed. In accordance with Securities and Exchange Commission requirements, he said, AOL should have disclosed "significant negative trends" that company officials knew about. "And certainly," Carmichael said, "the problems with dot-coms were material to them."

AOL sources who were familiar with these dot-com deals said the company considered taking the struggling firms to court to get them to pay for the ads that they had agreed to buy. But the sources said AOL determined that such a strategy wouldn't be fruitful because the public filings would show some weakness in its business.

So AOL advertising officials went to work. They strove to convert some of the risk to AOL's long-term ad contracts into a short-term gain, by getting one-time payments from clients who could no longer meet their obligations. That helped put off the day when the dot-com advertising swoon would be apparent in the company's quarterly results.

In some instances, AOL said in its written response to The Post, it would renegotiate a struggling dot-com's ad deal to shorten the term of the contract. The dot-com would pay AOL a fee for breaking the deal early, and that fee would be incorporated into the new, shorter-term ad deal, effectively creating a balloon payment. AOL would count all of the revenue, including the fee for renegotiating a shorter-term deal, as ad revenue.

AOL said it accounted for the deals properly. Amounts "earned by AOL under these types of long-term advertising agreements have always been advertising revenues and the restructurings do not change the character of those revenues, only the time frame over which they are measured and the amount that should be recognized," wrote Yannucci, AOL's attorney, in a letter to The Post.

From July 2000 through March 2001, AOL said, it booked $56 million from dot-com deals that were terminated or restructured, about 3 percent of its $2.1 billion in overall ad and commerce revenue during that time. In each quarterly earnings report during the period, the terminated and restructured deals ranged from 1.5 to 4.4 percent of AOL's advertising and commerce revenue.

Eventually, as the pattern of restructuring dot-com contracts repeated itself quarter after quarter, AOL reported the trend in the latter part of 2001. In its Nov. 14 SEC filing it said: "The growth in advertising and commerce revenues was driven by a general increase in advertising sales, including amounts earned in connection with the settlement of certain advertising contracts."

By the December quarter that year, online advertising had swung from growth to contraction, decreasing by 7 percent over the same period a year earlier.

24dogs.com

In September 2000, AOL found another way to boost ad sales: from a legal dispute.

The origins of the legal case reach back to 1992, far removed from AOL, when MovieFone Inc., an online ticketing firm, and a former subsidiary of Wembley PLC, a big British entertainment company, set up a joint venture to develop hardware and services for automated movie-ticketing sales, according to U.S. legal filings and British public documents. The parties had a falling-out, the matter went to arbitration, and three years later MovieFone won an award against the former Wembley subsidiary.

When AOL purchased MovieFone a year later in 1999, it inherited the $22.8 million arbitration award, plus interest, which had not yet been paid.

AOL said it would have been costly to litigate with an overseas company. So AOL in September 2000 offered an alternative: Buy $23.8 million in online ads instead. That would also save the British firm money -- requiring Wembley to spend $3 million less than the arbitration award, including interest, according to sources familiar with the negotiations and confidential company documents summarizing the deal.

But AOL had to move fast, the sources said. The company was short of its targeted advertising and commerce revenue for the Sept. 30, 2000, quarter ending just days away.

The British wondered what they had to advertise to AOL's users. Wembley was in the gambling business, operating greyhound race tracks in such places as Rhode Island and Colorado.

AOL's answer: 24dogs.com.

Wembley was preparing to launch 24dogs.com, an online greyhound-racing Web site. Still under construction, the Web site would allow gamblers to check the odds and place a bet on a dog.


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