AOL is giving away nearly all services

Strategy to benefit Baltimore subsidiary

August 03, 2006|By TRICIA BISHOP | TRICIA BISHOP,SUN REPORTER

Yesterday's announcement that AOL plans to boost advertising revenue by offering its services free to nearly anyone with an Internet connection reverberated from the company's Virginia headquarters to Locust Point, the home of Advertising.com.

The once tiny Baltimore start-up, founded by two local brothers and headquartered in the Tide Point office complex, is now best known as a major player in AOL's online marketing division.

It likely will be at the center of the media giant's new business strategy, which takes on freebie competitors Yahoo and Google by giving away e-mail, software and Web security tools.

"The pressure's on," said Allen Weiner, a media research analyst with Gartner Inc. in Arizona. "Advertising.com ... is going to play a significant role here. They're going to have to make sure they drive the revenue."

That's exactly the reason AOL acquired the company in 2004 for $435 million. Advertising.com's technology places relevant ads on Web pages, increasing the likelihood they'll attract attention and make a sale, which in turn, pleases advertisers.

By the time AOL bought the business, it already had 300 employees in eight countries and had placed ads on 1,500 Web sites, reaching 70 percent of the U.S. online population.

Since then, AOL's online advertising revenue, measured by Web-page views, has risen 80 percent. And in last year's annual report, the company repeatedly credited Advertising.com, now up to 370 employees, with boosting sales.

Under the deal, Advertising.com got the use of AOL's brand name, kept its current clients and expanded its reach while remaining headquartered in Baltimore. For the most part, it has been left alone to go about its business and treated as an independent unit.

But during the past few months, changes have been in the works that suggest AOL was shoring up the business in preparation for yesterday's news.

In the spring, AOL acquired Lightningcast Inc., a Washington company that does broadband video advertising, and merged it into Advertising.com. A new president with seven years of AOL work experience - Lynda M. Clarizio - came in. And John and Scott Ferber, the founding brothers, left on an indefinite leave of absence.

Emily Riley, an analyst with Jupiter Research in New York who worked at Advertising.com for five years, said yesterday that the Ferber brothers deserved a break and left the company on good terms. Clarizio, she added, has been received well. Riley's husband still works at Advertising.com in its New York office.

During a conference call yesterday, executives from AOL and its parent company Time Warner Inc. described the free strategy as a shift away from reliance on dial-up subscriptions toward an advertising-supported business model.

For years, the company made much of its money from those who used it to access the Internet and serving as the first gateway for many Web users. But as speedier means matured - such as cable and DSL connections - those subscriptions began to dwindle. Time Warner President and Chief Operating Officer Jeffrey L. Bewkes said the company loses tens of thousands of subscribers daily.

While AOL will still offer dial-up subscription Internet service, it will now also offer access to everything else for free. That means customers who decide to switch to broadband can keep using AOL services such as e-mail, instant messaging, parental controls and spam filters.

Those who've never had AOL can use them too. Company officials are hoping those efforts will keep advertisers interested in reaching AOL's 18 million customers.

It's "for the great good of the company going forward," said Jonathan F. Miller, AOL's chairman and CEO.

No one mentioned Advertising.com. during the call, and representatives from the company referred questions back to AOL.

In an interview yesterday, AOL's Michael J. Kelly said Advertising.com - along with other components such as search engine sales and video advertising - will be key in making the new strategy work.

"It's certainly hugely important," said Kelly, president of AOL Media Networks, which oversees Web and digital advertising. He describes the original acquisition, which he orchestrated with Clarizio's help, as one of the proudest moments of his career.

"One of the reasons we bought ad.com was to accelerate our growth in advertising revenue, and that worked," Kelly said.

tricia.bishop@baltsun.com

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