AOL's 2nd-quarter revenue drops 38%

Dial-up subscriber base shrinks

ad growth slows

August 02, 2007|By Cox News Service

NEW YORK -- A year after embracing a new advertising business model, Time Warner's AOL unit is facing plummeting revenue and seeing its advertising growth turn from promising to plodding.

Time Warner Inc., the media giant behind CNN, Time Warner Cable and the Warner Bros. film studio, reported yesterday that AOL's second-quarter revenue fell 38 percent to $1.3 billion as its dial-up subscriber base continued to shrink.

Advertising revenue, which AOL had counted on to offset that decline, grew 16 percent, falling off abruptly from the more than 40 percent growth of each of the past four quarters.

"The advertising numbers were horrible," said Greg Gorbatenko, a media analyst with Jackson Securities. "AOL should be a lot more healthy than we're seeing."

Overall, Time Warner profit was up 5 percent from April through June. Quarterly revenue rose 6 percent to $11 billion led by the strength of Time Warner Cable.

The New York-based company earned $1.07 billion, or 28 cents a share, up from last year's $1.01 billion, or 24 cents a share.

But the online weakness drew analysts' attention. At the end of June, AOL had 10.9 million U.S. subscribers, down 1.1 million from the last quarter and 6.8 million fewer than in the corresponding period last year. AOL's subscriber base has declined steadily from a high of more than 26 million in 2002.

The company accelerated that trend last August after it announced it would give away its software and AOL.com e-mail addresses to hasten the switch from a dying dial-up subscription business to one driven by the hot online advertising market.

"It's kind of looking like they made the wrong decision," Gorbatenko said.

Other analysts said AOL needs more time to adapt.

"The jury is still out," said Doug Williams, with JupiterResearch. He said AOL's overall numbers could improve if the collapse of AOL's dial-up subscriber base levels off, and "they can stop the bleeding."

While there has been speculation that Time Warner might spin off AOL, the company has said it has no such plans.

While saying AOL was continuing to make progress, Chief Executive Officer Richard D. Parsons pulled back yesterday an optimistic prediction that AOL's advertising would grow as fast as or faster than the rest of the U.S. Internet industry's.

"We're stepping back from our expectation," he said on an analyst conference call.

Parsons said a fallback in advertising this quarter was expected. He blamed the slowing partly on changes to AOL Web sites intended to better engage users.

"These kinds of upgrades often lead, in the beginning, to a slowing of traffic," Parsons said. "Users usually require a little time to become accustomed to the redesigned pages, while advertisers naturally want to see how the new programming performs before reinvesting significantly."

Emphasizing the positive, Parsons said traffic at AOL Web sites is rising, and the number of "page views is key to sustain AOL's advertising success."

AOL said last week that it was buying Tacoda Inc., a company that delivers targeted advertising based on a person's Web surfing habits.

Gorbatenko said AOL should give up on trying to innovate and copy what works for its rivals.

"At this point, I would try and make myself look and feel and act as closely to Google's revenue model," he said.

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