A Major Studio Named Aol?

It's counting on original content to jack up ad revenues

Ozzie the Elf, a blue Santa's helper with attitude, is about to tread where no online character has gone before. On Dec. 12, the character, created last year by America Online Inc. after children started sending E-mail to Santa Claus, will cross over to TV as the star of an ABC Christmas special, The Online Adventures of Ozzie the Elf. Ozzie won't be limited to the little screen, though. AOL also landed a deal with Penguin Putnam Inc. to publish Ozzie's first book, Ozzie the Elf: How I Put Santa Online, in time for the stocking-stuffing season. In both the TV show and the paperback, Ozzie is given the task of "upgrading Christmas."

Now AOL is hoping the upgrade will rub off on the online service, too. The pizza-loving Elf could be the first hit out of AOL Studios, the content arm established a year ago to help transform the No.1 online service into a media giant. For the past 12 months, AOL Studios has been coming up with snazzy online content targeted at mass TV audiences and Internet surfers who may be bypassing AOL today. The idea: to supplement low-paying subscriber fees with TV and book licensing deals, as well as make AOL so heavily trafficked that it can charge lucrative advertising rates. "AOL sees the writing on the wall," says Seema Williams, an online analyst at Forrester Research Inc. "They want to be in content when the distribution business loses its power."

SECOND SMASH? That's why AOL Studios is churning out new programming as fast as it can. In December, AOL's women's site, Electra, will be launched on the Web, and Real Fans Sports Network is expected early next year. These follow last month's rollout of Entertainment Asylum, a site on AOL and the Web for movie, TV, and music buffs hosted by the hip "screen team." AOL is hoping this will be its second smash after Ozzie and already is in talks for cable and radio spin-offs. Cowen & Co. analyst Jamie Kiggen figures such media cross-pollination could contribute 15% of Studios' estimated $50 million total revenue in 2000. "We'll be among the two or three leading online content companies in three years," boasts Ted Leonsis, CEO of AOL Studios.

What AOL Studios can't create, it may buy. On Nov. 20, Studios is expected to announce the purchase of Extreme Fans, in which AOL already has a minority stake. It will relaunch the sports site next year as the core of Real Fans. Leonsis is mum, but insiders also say that AOL is in talks to acquire Williamstown (Mass.)-based Tripod Inc., the 14th most visited Web site, which caters to Generation X users.

It doesn't hurt that AOL is now throwing its weight behind the Studios arm. After a rocky year of quarterly losses, a low cash balance, and embarrassing network problems, AOL can now afford to focus on content. On Nov. 6, AOL posted fiscal first quarter 1998 profits of $19.2 million on record revenues of $521.6 million. Six days later, it announced a $350 million private debt financing, which, with an infusion from a deal to sell its computer network to WorldCom Inc., bolsters AOL's cash to $800 million--money that Studios needs in its content bid. "Over the next year, AOL Studios will come into its own," vows AOL Chairman Stephen M. Case.

Critics, though, are skeptical. They question whether the online service has the name power to attract a large audience and, more important, advertisers. Indeed, AOL's $68.2 million in ad and electronic commerce revenues in the first fiscal quarter of 1998 fell short of the previous quarter's $80 million. While the company chalks that up to more conservative accounting practices, ad agencies complain that AOL isn't giving them the data they need to reach specific types of customers. "Other advertising vehicles let us target geographically and by time of day," says Scott Heiferman, CEO of i-traffic inc., a New York online ad agency.

CREATIVE GENES. What's more, the categories AOL Studios is targeting--entertainment, women, sports, and games--are overrun with deep-pocketed rivals, such as Walt Disney Co. and Time Warner Inc. "AOL may have waited a little long," says Candice Carpenter, chairman of iVillage, the biggest maker of women's online content and an AOL partner. "They're less assured of ending up in the No.1 position." And so far, with the exception of Ozzie the Elf, AOL hasn't shown it has the creative genes to give birth to compelling content, rivals say.

Case disagrees. "Traditional media companies may think it's their manifest destiny to lead in any new venue," he says. "But we're positioned better to be a major player in interactive media."

AOL does have a keen advantage as the premier online service, with 10 million subscribers, up from 7 million just a year ago. With its dominant distribution channel, it can showcase Studios' content, lowering the cost of content creation and marketing. While most Web sites spend some $50 million before breaking even, Leonsis figures he can hit the magic point after expenditures of up to $20 million. Entertainment Asylum, for example, registered 200,000 page views a day within the first week, while it takes most Web sites a year to reach such numbers, Leonsis said.

Even so, Wall Street hasn't been convinced AOL's distribution muscle will carry Studios. Leonsis' efforts to raise money this year through private placements met with investor skepticism. He has since withdrawn them, but maintains investors will gain confidence as the new content is launched.

If Ozzie & Co. can strut their stuff, AOL may be able to win both dollars and applause.

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