AOL Loses Subscribers, And Ad Growth Drops

By Anick Jesdaun
Associated Press
Thursday, August 2, 2007

AOL continued to lose subscribers and advertising growth slowed, signaling trouble for the online media company's recent shift in strategy.

Dulles-based AOL posted its weakest quarter of advertising growth since announcing a year ago that it would try to drive traffic to its ad-supported Web sites by giving away e-mail accounts, software and other features once reserved for paying customers.

AOL, Time Warner's online division, had $522 million in ad revenues in the quarter ended June 30, a 16 percent increase from $449 million in the corresponding quarter a year earlier. By contrast, ad revenues grew 40 percent or more in each of the previous four quarters.

Ad growth remained too meager to fully offset declines in subscription revenue, which continued to plummet, as expected, after last August's strategy shift. AOL had 10.9 million U.S. subscribers paying for Internet access as of June 30, a 59 percent drop from its peak of 26.7 million in September 2002.

Rob Enderle, principal analyst with the Enderle Group, said AOL's strategy shift was crucial and has kept the company in business, but unless it becomes more competitive, "this property will be without value by this time next year."

Overall revenue at AOL dropped 38 percent, to $1.3 billion. AOL accounts for 11 percent of Time Warner's revenue, about half of the 20 percent it had contributed until last June.

In a conference call yesterday, Richard Parsons, Time Warner's chairman and chief executive, said the company no longer expected AOL's ad sales to meet or exceed the growth rate seen by the broader U.S. Internet industry this year. He attributed some of the slowdown to recent redesigns of AOL's Web sites, including tools for e-mail and search.

AOL's audience has been growing at a pace below Google, Yahoo and MSN.

AOL hopes its agreement to buy Tacoda, the behavioral-targeting ad firm, will increase the value of its ads. David Hallerman, a senior analyst at the research group eMarketer, said the purchase also extends AOL's reach to third-party sites.

Parsons told financial analysts that ad dollars have been shifting toward third-party ad networks, putting pressure on AOL's own sites. But AOL should be able to weather that, he said, with holdings like, which sells ads for both AOL and outside sites. The company said advertising on such third-party sites rose 32 percent.

AOL's rivals are also hoping to extend their ad reach beyond their own sites. Google plans to buy DoubleClick, while Yahoo acquired Right Media, and Microsoft has announced it's buying aQuantive.

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