• by March 31, 2004

Time Warner's America Online has been quiet for some time on the advertising front, but a Wall Street analyst lit a flare Wednesday in a research note estimating 13 percent growth in online ad revenue for the AOL division in 2004.

In the report "AOL, Hitting the Inflection Point?," Merrill Lynch analyst Jessica Reif Cohen suggests there are signs that AOL "has indeed begun to enjoy very impressive online advertising momentum," despite the fact that the momentum continues to be compared to a backlog of legacy ad deals. Cohen's note says that online advertising revenue rose in each of the last three quarters, although it was "masked to some degree" by comparisons to old ad deals and writedowns of backlog revenue.

The note projected $866 million in ad revenue for 2004, versus $787 million in 2003. However, Cohen projected a 12 percent dip in AOL advertising for the first quarter, on a reported basis. Excluding legacy ad deals that were signed prior to 2002, Cohen estimated that AOL could see 30 percent ad growth. Bright spots cited included the auto, jobs, entertainment, and travel categories. With respect to sponsored search and AOL's alliance with Google, Cohen noted that price-per-click and click-through rates are "at or above industry levels, though the number of searches is a good deal lower than Yahoo!"

Amid talk of spinning off the AOL division, Merrill pegs AOL's value at $7.4 billion. Time Warner reports first-quarter earnings on April 28. Jon Miller, AOL's CEO, makes a divisional progress report to the Time Warner board on April 22. AOL remains a cash cow for Time Warner, and it's unlikely that any real decision on a possible sale or spinoff will be made in the near term.

But last month, in answer to a question raised at the MSN Strategic Account Summit, Microsoft Corp. CEO Steve Ballmer didn't exactly quash rumors and published reports that the software giant has been in talks with Time Warner about a possible AOL spinoff. "It's always inappropriate to comment on that kind of a rumor," Ballmer said, continuing: "We do have a very good relationship with Time Warner. We're in a very different place with Time Warner and AOL than we were a year or so ago. It was good to settle the matters we had in front of us. We have a good, friendly, healthy competition with AOL. My advice to you would be to not pay attention to [the rumors] and they will come true."

If Microsoft did acquire AOL, putting aside potential anti-trust issues and clearing the cobwebs from investigations into AOL's accounting practices, what MSN would do with 23 million dial-up customers remains to be seen.