The head of America Online Inc. said yesterday that he plans to take a hands-off approach to running Advertising.com Inc., the growing, profitable online ad firm that AOL is buying for $435 million.
In an interview, AOL chief executive Jonathan F. Miller compared his desire not to interfere with the company to the strategy pursued by Yahoo Inc. after it bought the Overture Services Inc. search engine last year. After buying Overture, Yahoo's sales grew from increased advertising on its own Web site and from ads generated through Overture's role in providing search services and ad content for hundreds of other companies, including Microsoft Corp.'s MSN.
Miller is optimistic that Advertising.com can achieve similar success. He's hoping it will significantly increase ad sales for Dulles-based America Online, which has considerable ad space waiting to be sold on many areas of its Internet service, and by continuing to increase the business Advertising.com does with hundreds of clients. AOL, he said, should benefit from the firm's broad exposure to the surging Internet ad sector, which exceeded $7 billion last year and is growing at a double-digit rate.
"We are interested in what they are doing because it was working, not because we thought we could do it better or liked the technology," Miller said. "I understand how to manage a business that is part of something but operates stand-alone from my own history with [former employer] USA Interactive. It is a good model."
Miller noted that his philosophy regarding the acquisition is, in some ways, a break with precedent at AOL. Some analysts have criticized the Internet firm in the past for trying to impose America Online's culture on businesses that it bought, or basing deals on the possibility of synergy.
"It is different than in the recent past," Miller said of his plans.
Advertising.com and Overture operate side by side in the hottest segment of online advertising, known as pay-for-performance. Both firms generate revenue based on the number of customers who click on ads, rather than by simply charging fees, as AOL traditionally has done, based on the number of people who may view an ad.
But there are also key differences in the way Advertising.com and Overture present ads to Internet users. Overture, on Yahoo and other Internet sites, generates leads based on what people search for online, the top segment in Internet advertising these days.
Advertising.com, by contrast, acts as a middleman, or broker, by matching hundreds of buyers and sellers of online advertising space. The firm goes further than a typical ad agency would by purchasing ad space from search engines and Web sites, then reselling that space to companies. In that sense, Advertising.com takes on more financial risk than a traditional ad agency, which advises a company on where to advertise but does not own ad space itself.
Major advertisers who rely on Advertising.com include H&R Block Inc., AT&T Wireless Services Inc., Verizon Wireless, MetLife Inc., and Best Western International Inc. Last year, the company reported sales of $132.3 million and profit of $18.7 million.
In recent quarters, America Online has been losing dial-up subscribers, but its advertising revenue has increased from fees earned from a partnership it has with Google Inc., which provides Web search services for AOL users. Miller said that by owning Advertising.com, AOL is positioning itself to grab a greater chunk of ad revenue growth than it could by merely partnering with the firm.
Miller's interest in buying Advertising.com was piqued by a meeting he hosted at AOL headquarters this spring with the company's chief executive, Scott A. Ferber, and other members of senior management. Toward the end of that session, Ferber made it clear that Advertising.com needed capital to grow and was prepared to go public to raise funds.
"There was a real meeting of the minds," Miller recalled of his initial discussions with the 34-year-old Ferber, his brother Scott, who serves as vice chairman, and W. Gar Richlin, the company's chief operating officer.
In May, Advertising.com filed papers with the Securities and Exchange Commission outlining plans to sell stock to the public. Miller said the filing forced him to focus more intensely on the prospects for an acquisition, since it would be simpler to accomplish, and perhaps less costly, while Advertising.com was still privately owned.
Youssef Squali, an analyst with Jefferies & Co., described AOL's pending acquisition of Advertising.com as a "smart move."
"Strategically it does make sense," Squali said. "It puts the company more squarely within the sweet spot of online advertising."
The board of Time Warner Inc., AOL's parent, approved the acquisition in a conference call last week. While the transaction, which is subject to regulatory approval, is a small deal for media giant Time Warner, it is a big deal in Dulles, where it is seen as a major vote of confidence in Miller that offers the potential to expand AOL's reach on the Web.
"We are leaning into growth areas going forward," Miller said. "It is a signaling deal more than a signature deal."