By Catherine Yang A small ray of light reached the doorstep of beleaguered AOL on June 24, when parent company Time Warner (TWX) bought Advertising.com for $435 million in cash. The Baltimore-based acquisition is the industry's biggest third-party ad network, and AOL's first major acquisition in years. The deal almost looks like a reward to AOL for weathering two brutal years of declining business and ongoing federal accounting investigations. But clouds still gather. Just the day before, federal prosecutors arrested an AOL employee for allegedly selling 92 million members' e-mail addresses to an alleged spammer.
For all the woes surrounding the online division, AOL's new property is a show of faith by Time Warner bosses. Just a few months ago, rumors swirled on Wall Street that Time Warner might be ready to sell the division. But the purchase of Advertising.com gives AOL a leg up to pursue a more profitable future.
"Online advertising is back, and AOL's acquisition of an already profitable and scalable business will provide us with additional reach and tools to strengthen our competitive position in this business," said AOL CEO Jonathan Miller during a June 24 teleconference.
ALL SORTS OF EYEBALLS. AOL has been slower than competitors such as Yahoo! (YHOO) to benefit from the upswing in online advertising, because it had to work off a much bigger backlog of soured boom-era deals. Most of the hard work is done now, and AOL's take from advertising is reviving. For the first time in 11 quarters, ad revenues are expected to rise in the second quarter -- up 5%, to $184 million, vs. a year earlier, according to Fulcrum Global Partners analyst Richard Greenfield. AOL is counting on this high-margin business to boost cash-flow margins, even as it continues to lose dialup subscribers at a rapid clip.
With Advertising.com, AOL acquires a leading pay-for-performance online-ad service. Advertising.com, which had filed for a promising IPO in April, buys ad space across top Web sites that reach 110 million unique users a month, or more than 70% of U.S. Net surfers. Using proprietary technology, it can sell advertisers packages of inventory tailored to specific demographic groups. Payment is based on the number of active registrations or transactions that result -- not merely on the number of impressions generated. Advertising.com reaped $12.1 million in operating income on $132 million in revenues last year. It will run as an independent unit under AOL.
The online giant has taken several steps to bolster its ad business. Its 2002 partnership with search engine Google generated $200 million last year in search revenue, online advertising's hottest area. Now, Advertising.com adds a new pay-for-performance option to round out AOL's traditional pay-per-impression business.
BRANCHING OUT. This year, AOL also abandoned its long-time proprietary Rainman format for Web coding and converted its pages to regular html, making it easier for advertisers to place standard ads on the service. The division is also making some AOL content available for nonsubscribers, increasing the number of eyeballs that advertisers can reach.
Though AOL is still suffering from quick shrinkage in its core dialup subscriber business, the unit is banking that new growth businesses -- including online ads and, eventually, broadband services -- will lay a path to a solid future. At least for now, it looks like Time Warner is making that bet, too. Yang is a correspondent in BusinessWeek's Washington bureau