AOL Asks: What Ad Bust?


Advertising isn't just down. It's out. In June, ad-spending guru Robert Coen of Universal McCann lowered his advertising growth forecasts for 2001 to a measly 2.5%, which would bring total spending in all media to $249.8 billion. That's less than half the 5.8% growth rate forecast in December, 2000.

Among the hardest hit sectors, of course, is Internet advertising. On July 11, industry bellwether Yahoo! reported that second-quarter revenues had fallen to $182.2 million from $273 million in the same period last year, due to the online ad slump. DoubleClick, too, reported a marked slowdown. On July 10, it said its net pro forma losses widened to $9.5 million, from $3.8 million a year earlier. "We don't see any indication that ad revenue is going to pick up in the third quarter," said CEO Kevin Ryan.

Not everyone is suffering, however. Rising above the wreckage is AOL Time Warner (AOL), which during the past six months has signed 10 multimillion, multiplatform deals with advertisers such as AT&T Wireless, Cendant, Foundry Networks, Kinko's, and Princess Cruise Lines. Terms of the deals haven't been disclosed, but analysts estimate they'll bring in more than $100 million in revenue this year.

CHUGGING ALONG. These kinds of deals helped the company deliver encouraging first-quarter results. AOL reported $721 million in online advertising and e-commerce revenues (AOL doesn't break out ad revenue separately) for the first quarter. That's a 37% increase over the first quarter of 2000, the height of the dot-com boom. On June 20, at the Cannes International Advertising Festival, AOL Time Warner CEO Gerald Levin indicated that ad revenues were continuing to grow apace, particularly for AOL's online service.

What keeps the AOL engine chugging? The company has had just as hard a time delivering results to online advertisers as the next guy. Witness the spectacular flameouts of sites such as Dr.Koop.com, which in July, 1999, committed itself to an $88.5 million multiyear deal with AOL after raising $89 million in its initial public offering a month earlier. The company was delisted from the Nasdaq in April and is now trading at around 16 cents a share. (AOL insists that Dr. Koop's problems went far beyond its deal with AOL.)

Yet at a time when advertisers are becoming more and more demanding, AOL continues to cut big deals with jittery Old Economy advertisers. The key to success, analysts say, is AOL's ability to communicate with traditional advertisers in a language they understand: size of audience and reach.

Moreover, AOL is successful at milking its corporate and personal relationships with big advertisers. Of the 10 big ad pacts that have closed this year, three involve technology suppliers to AOL and another three involve companies that have equity relationships with AOL or its executives.

EASY-TO-USE APPROACH. AOL built its consumer brand by becoming your father's -- even your grandmother's -- Internet. With big buttons and easy-to-use e-mail and instant-messenger services, AOL came to embody the easiest way for technophobes and newbies to jump on the Internet bandwagon. The strategy worked. AOL now has more than 30 million subscribers -- six times as many as its closest competitor, Microsoft's MSN. The average AOL user spends 67 minutes online per day.

Now the company is using the same easy-to-use approach with advertisers. The message is simple: No one comes close to AOL's number of users or their average time spent online. Therefore, AOL is the obvious choice for big advertisers.

With one ad, the theory goes, advertisers reach the broadest section of consumers. Sound familiar? That's the same critical-mass pitch that network TV has used to sell ads since the 1960s. Top advertisers such as General Motors and Philip Morris forked over $44.5 billion for network-TV ads in 2000.

AOL UNDERSTANDS. Most Internet publishers emphasize the differences between offline and online ads, delivering long lectures to traditional marketers about the rebirth of advertising. Not AOL. "AOL positions its property in the language of the traditional marketer. It talks about reach and subscribers. That's something that advertisers with big bucks can relate to," says Rudy Grahn, an advertising analyst at Jupiter Media Metrix.

In fact, understanding what advertisers want has always been one of AOL's strengths. When portal deals -- where advertisers and publishers pay to put their content on AOL's service -- were the craze in 1998 and 1999, AOL made hay. In 1998, AOL signed more than 50 such deals worth $1 million or more each. In 1999, eBay forked over $41 million, according to published reports, and CareInSite, later bought by WebMD, signed a $30 million deal for promotion on AOL.

The crowning glory was a $500 million, five-year package with credit-card issuer FirstUSA. The two companies had been selling an AOL credit card since 1996, but the deal made FirstUSA the exclusive marketer of credit cards and services on AOL properties in North America and Canada.

"BATTLE PLAN." AOL also has scored big deals through a coordinated effort to leverage its personal and financial relationships. Twice each month, 15 of AOL Time Warner's senior marketing executives file into a conference room in the AOL Time Warner building in New York for a meeting of the company's advertising council.

Headed by Chief Operating Officer Bob Pittman, the heavy-hitting group is charged with finding ways to make the AOL, Time, and Turner Networks ad sales forces work together more closely. "The idea is to be very specific in how we approach things, who approaches who, and what's the battle plan for every potential partner," says Myer Berlow, AOL's president of worldwide interactive marketing and a member of the council.

The results are impressive. AOL persuaded Foundry Networks, Nortel, and Cisco -- all long-term technology suppliers to AOL -- to sign multimillion dollar, cross-platform marketing deals that have substantial online components. What's unusual is that these companies make complex networking gear, a far cry from the consumer goods one would expect to be the natural purchase for AOL's members.

PERSONAL TIES. Part of the draw is the ability to advertise across all media with one company, though it's not yet clear whether cross-media deals help advertisers get their messages out more effectively. Advertisers do benefit from the markdowns that come with such large buys. Although AOL's Berlow denies the deals include discounts, Foundry Networks' Marketing Vice-President Ken Chang says the company received "significant discounts because of the amount we are buying."

Personal relationships also drive deals. Pittman had a hand in persuading Cendant, a leading purveyor of travel, real-estate, and financial services, to "expand advertising" across AOL Time Warner's brands. Before joining AOL, Pittman served as chief executive of Century 21 Real Estate, a unit of Cendant, where he is still a director and shareholder.

As for Kinko's, AOL quietly maintains an 11.5% stake in the closely held company, according to a Sept. 30 shareholder filing. The companies in March inked a deal for a variety of interactive Kinko's promotions across the AOL Time Warner brands, as well as in print and on TV. "The strategy makes a lot of sense. It will help [AOL] get through the dark days. And it's a tribute to their power to leverage relationships," says John Corcoran, a new-media analyst at CIBC World Markets in Boston.

REAL RESULTS? Such deals suggest that advertisers have not turned their backs on the Net. But critics insist that AOL is better at closing deals than at delivering results to advertisers. The Internet, they claim, is a one-to-one medium to which the network TV metrics of audience size and reach don't perfectly apply.

By ladling out TV measures to justify online advertising, this theory goes, AOL could poison the waters for smaller players and condition ad buyers to develop unrealistic expectations. "Advertisers automatically think that with AOL they're getting 60 million individuals, and that's a phenomenal opportunity. What they don't realize is that you don't reach them all at one moment in time. You don't get what you think you are paying for," says one advertising executive, who requests anonymity.

Moreover, the 67 minutes per day that the average AOL user spends online may not translate into sales for advertisers, because many AOL users spend much of their time on e-mail and instant messaging -- not browsing the content or e-commerce services AOL provides, analysts say. "Advertisers don't make money off 13-year-old kids sending e-mail and instant messages after school. The value that advertisers get based on traffic is a bit deceiving," says CIBC's Corcoran.

That could hurt the company down the road, but the ability to close deals now has made AOL shine. "In the long run, AOL will be hurt if it doesn't evolve and learn to develop ad [strategies] that fit the medium. But it certainly isn't hurting them now," says Jupiter Media Metrix's Grahn. Should AOL's tactics miss the mark in the future, the savvy Pittman will be pressed to refine his game plan to play to the market's whims. Something he has adroitly done so far. By Jane Black in New York


Steve Ballmer, Power Forward
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus