AOL officials didn't care that the Telefonica link from AOL's English-language welcome screen took users to a Spanish-language site, said AOL sources familiar with the deal. Nor did it matter that Telefonica's computer servers couldn't handle all of the customer traffic from AOL, they said.
AOL succeeded in running the Telefonica ads fast to book the revenue before Dec. 31, as accounting rules required.
David Colburn was chief of the AOL unit that put together deals that are under investigation by the SEC and Justice Dept.
(Courtesy Chai Lifeline)
But after the deal was done, and January came along, AOL was still running the Telefonica ads. Under the deal, they were supposed to have stopped in December.
When some AOL officials noticed the ads were still running, they raised questions and learned it was happening at the behest of business affairs. The unit's officials had struck a verbal agreement with Telefonica to continue running hundreds of millions of ad impressions for months beyond December, as a bonus, the sources said.
The bonus, it turned out, was a key condition for Telefonica agreeing to spend $15 million on ads that would run in the December quarter, the sources said. Without the bonus, Telefonica would have insisted on running the $15 million in ads over several quarters, which would have forced AOL to book a smaller amount of revenue in the December period, the sources said.
In the end, AOL's internal accountant determined that the $15 million December ad deal was really part of a longer-term commitment, which included the ads that had run as part of the bonus deal, sources said. As a result, internal accountants moved about $5 million of the Telefonica revenue from AOL's December quarter to the next quarter.
AOL said the firm's action "highlights the rigor and integrity of AOL's internal accounting controls."
Telefonica declined to comment on the specific transaction, but in a statement it said, "Our relationship with AOL covers several areas and we at Telefonica are satisfied with all aspects of this relationship."
After the merger, the ad market continued to weaken in 2001, forcing down online ad rates. Robert O'Connor, then vice president of finance for AOL's advertising division, said he warned company executives last year and this year that the trend would eventually create a fundamental business problem.
As the price of online ads fell, AOL would be forced to sell more ads to reach its revenue targets, O'Connor told other company officials. There was a finite number of Web pages that AOL's users viewed in a given period. Eventually, AOL would run out of online space -- inventory -- to run ads where consumers would see them.
As it was, AOL was racing to run all the ads it was selling. In some cases, AOL resorted to what was known internally as "jackpotting." The term referred to gambling slot machines, where, for example, three cherries in a row wins.
In AOL's case, jackpotting meant it would run the same ad three times on a single Web page, often at the bottom of the screen, where it was less visible, sources said.
AOL also took advantage of its "ad rotation" to run more ads, sources said. When viewers look at a screen, the Web page automatically refreshes itself at a specific interval, sometimes from eight to 10 seconds.
But at the end of a quarter, when AOL was trying to meet its financial targets, it would increase the speed of the ad rotation to get credit for running more ads, sources said.
In late February this year, AOL executives informed O'Connor, who continued to raise questions about inventory, that he was not a team player and that he no longer had a bright future at the company, according to a company e-mail. O'Connor immediately said he would resign. AOL would not comment on O'Connor or his departure.
Berlow, later named president of global marketing solutions for the parent company, tried to persuade AOL officials to stop O'Connor from leaving. In a March 8 e-mail to Barry Schuler, then chairman and chief executive of the Internet division, Berlow defended O'Connor.
"The only reason you know that there is an inventory problem is that Bob [O'Connor] continued up the ladder with the inventory problem (Bobby-Ripp-Kelly-Mayo) and shot his career out the window," Berlow wrote to Schuler.
Berlow was referring to Robert Friedman, then head of AOL's interactive marketing division; Joseph A. Ripp, chief financial officer of the Internet unit; J. Michael Kelly, the chief operating officer; and Mayo Stuntz Jr., executive vice president of AOL Time Warner's cross-divisional initiatives.
O'Connor left the company on March 29 without negotiating a severance package. He said he was no longer comfortable working in an environment where officials didn't want to hear about internal business issues.
"Not only were they not willing to get out of denial," he said, "now they were going to actually punish those who were going to even raise issues."
Staff researcher Richard Drezen contributed to this report.