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You've Got Mail -- But Not Enough Ads


In the past two years, advertising on the Internet has taken off. But one online giant has been conspicuously missing from the party. With 23.4 million U.S. subscribers, America Online Inc. (AOL) should have raked in fistfuls of ad dollars along with Yahoo! (YHOO), MSN (MSN), and Google (GOOG). After all, the leading subscription service beats its top rivals in time spent online per visitor -- 401 minutes a month. Yet in ad sales, AOL trails the others, booking just $221 million in the second quarter, vs. $467 million for industry leader Yahoo! Inc. "For so long, the Big Three were AOL, MSN, and Yahoo," says Jeff Lanctot, vice-president at Seattle's Avenue A/Razorfish, a leading online-ad agency. "Increasingly, the Big Three are Yahoo, MSN, and Google."

Can AOL muscle its way back into the top tier? It sure is trying. On Oct. 14 the online giant was expected to launch a redesign of its aol.com site. Used mainly by subscribers to check e-mail away from home, it will come loaded with much more content and services, including a news ticker and beefed-up sports and music. The idea: invite greater use by members and, in turn, attract more advertisers. What's more, AOL execs say, they will soon throw open the site to the nonmembers to gin up even more ad sales. Says Mike Kelly, president of AOL Media Networks: "Our goal is to get a fair share of the ad market."

FREE IS WHERE THE ADS ARE

That's a must, considering AOL's bread and butter subscription business is stagnating. But CEO Jonathan F. Miller's embrace of a free site on the Web may be a tacit concession that a business model based on subscriptions is fast becoming obsolete in the broadband era, when Web surfers can navigate easily to any destination on the Web. It's a move others have already made. Over the past three years, for instance, MSN scaled back its Internet access business sharply to focus on its free site. Now the MSN site has a panoply of free services, from Microsoft Corp.'s (MSFT) Encarta encyclopedia to phone directories to driving tips. With nearly 100 million visitors flocking to the site every month, MSN has also become a magnet for advertisers. Another key reason advertisers love MSN, Google, and Yahoo is their prominent search features. While AOL partners with Google in search, it must share all search-related ad dollars with the search giant.

Still, by fishing for ad dollars on a non-subcription site, AOL must strike a careful balance. Miller must offer just enough content and services from his flagship service on the open Internet to lure fresh customers and ads but not so much that loyal members realize they'd be better off canceling their monthly subscriptions, which range from $14.95 to $24.95, in favor of using the free site. Given AOL's much larger subscription base, that's a much tougher task than MSN faced.

Miller, who declined to comment for this story, has little choice but to go all out to nab ads. As subscribers defect to broadband and discount dial-up brands, the total number of subscribers has fallen 12%, from a high of 26.7 million in 2002. Meantime, online advertising and commerce, just 13% of total sales now, is the surest road to the double-digit growth that parent company Time Warner Inc. (TWX). demands from AOL's bottom line. Industrywide, online-ad revenues jumped from $5.8 billion in 2002 to an estimated $8.4 billion this year, according to Jupiter Research.

One problem: AOL had to dust itself off from an accounting scandal that broke in '02 and a pending Securities & Exchange Commission investigation. While Miller has been rebuilding a decimated ad staff, MSN, Yahoo, and Google have been thriving, with crack ad teams who push new ways to promote ads on their nonsubscription sites. Indeed, on Oct. 12, Yahoo reported a 91% jump in third-quarter profits, to $124 million, largely on higher ad sales.

AOL is making some gains. In June, AOL bought the Advertising.com ad network for $435 million to help boost its ad business. The move seems to be paying off. Its second-quarter ad sales were up 23% from a year ago. But from here on out, the action will likely be on the free Web sites. Now the trick is to woo advertisers without losing subscribers. That won't be easy, but it's a tightrope AOL has no choice but to walk.

By Catherine Yang in Washington, with Jay Greene in Seattle


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