The New AOL: From Ugly Duckling To Swan

Look for Time Warner's ugly duckling AOL to emerge as a swan when earnings are announced next week.

Smart acquisitions, new hires, a move to drop the subscription wall, and a focus on original content have both analysts and agency heads praising the unit for the first time in years.

As its Advertising.com unit continues to perform strongly, AOL added another asset this week--announcing its intention to buy behavioral ad-targeting network Tacoda for a reported $275 million.

"They're definitely turning into a bright spot for Time Warner," said Ed Montes, managing director at Havas' Media Contacts.

Clark Kokich, just-named CEO of Avenue A|Razorfish, said he's seen a spike of more than 300% in client spending with AOL over the past year--a trend he attributes to three causes: service, technology, and products.

"AOL has made a concerted effort to build up a high-quality, experienced sales team focused on agencies," said Kokich. "This is a big change from the past, when they tended to ignore agencies and go directly to clients."

Regarding technology, Kokich said, "the shift from their proprietary Rainman technology to all-HTML has been a big boost." In the area of products, AOL has "developed some very smart offerings, particularly in video, through exclusive content deals," added Kokich. "For example, their TMZ (30-mile zone) entertainment product has done very well."

"I think everybody's feeling good about AOL's turnaround," said Bob Liodice, president and CEO of the Association of National Advertisers.

Opening up to change, AOL Chairman and CEO Randy Falco and chief operating officer Ron Grant recently outlined their plan to grow business using fewer ads. Grant described it as the "uncluttering of the AOL environment" during a Goldman Sachs conference in May. As a result, said Grant, "our ads are delivering better value for our advertisers."

AOL is also in the process of placing more emphasis on search through AOL's ongoing partnership with Google, as well as social networking and sports coverage. "We know we're behind in sports and social networking," Falco said in May.

Earlier this year, AOL helped parent company Time Warner post better-than-expected earnings for the first quarter. AOL's ad sales soared 40% year-over-year, thanks largely to its move from a walled-off subscription service to a free, ad-supported Web portal.

AOL's overall revenue fell 25% due to waning subscriptions, but that didn't keep its adjusted operating income before depreciation and amortization, or OIBDA--a key measure of profitability--from rising 27%.

Advertising.com has been a major driver of growth for AOL. And in April, Advertising.com won the privilege to provide display and video ad management services for the yet-unnamed video venture between NBC Universal and News Corp.

In April, ads served across the Advertising.com display network reached a whopping 88% of all U.S. online consumers--or 156,037,000 unique visitors. This reach, according to comScore Media Metrix, surpasses all other online advertising entities.

"Their strategy with Ad.com has been enormously successful, which has been to leave them to act independently," said JupiterResearch analyst Emily Riley. "It's more like a holding company rather than folding them into the AOL brand, which might have complicated matters."

Shoring up Ad.com's suite of Web publisher services, AOL earlier this year bought Third Screen Media, the leading mobile ad network, and AdTech AG, an international online ad-serving company based in Frankfurt, Germany. Those two buys followed AOL's purchase of Lightningcast, which delivers ad solutions for video content. And now there's the addition of Tacoda.

"AOL was the real pioneer in broadening their exposure in terms of unsold inventory when they acquired Ad.com back in 2004," said Gal Trifon, president and CEO of independent ad serving shop Eyeblaster.

Trifon is even more excited about AOL's content initiatives than the company's future monetization of unsold ad inventory.

"There's a very promising opportunity in bringing more big-name advertisers online with more traditional content and original content," he said.

"Rather than just being an aggregator of content," agrees Media Contacts' Montes, "their value as I see it has come from superior content in terms of endemic categories like autos or lifestyle. It's very easy to monetize from a brand standpoint."

Helping AOL's cause, Nielsen//NetRatings recently ceased ranking Web sites by page views and is instead ranking them by time spent. As a result, AOL, which had been the sixth-most-popular site by page views, now ranks first. That's thanks largely to AIM, its popular instant-message service, which is also ad-supported and will now be counted in Nielsen's rankings.

Further strengthening its relationship with display advertisers, AOL this year launched a private-label version of Google AdWords search allowing advertisers to place search ads only within the AOL network.

The so-called AOL Search Marketplace was an expansion of a five-year strategic relationship between Google and AOL struck in December 2005, in which Google powered the contextual search ads found on the AOL service.

The initiative is also intended to give AOL a better shot at getting some of the search ad dollars that have traditionally gone to Google.

Other recent initiatives include the launch of AOL Local Search, which incorporates technology from MapQuest and CityGuide, and an AOL Shopping and Commerce Search, which came from a partnership with comparison shopping site PriceGrabber.com.

Reinvigorated, AOL has been busy assembling a solid team of executive leaders. Earlier this year, it named Time Warner executive Nisha Kumar to the position of chief financial officer, reporting to Falco.

Former AT&T vice president of marketing John Burbank is also onboard as chief marketing officer. Part of his mission is to get the new AOL story out to consumers.

To continue its impressive growth, AOL needs to better exploit its strengths, Falco and Grant said in May

"We need to open up AIM," said Grant, referring to how it could be integrated into other areas of a consumer's Web experience.

MapQuest, AOL's mapping service, is another asset the company has so far failed to capitalize--letting rival services like Google Maps move in on market share, he said.

"It's been a little under-invested," said Grant. "You're going to see a much revitalized MapQuest."

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