Behind AOL's Move to Manhattan: Ads

As competition for advertisers grows even fiercer, the company wants to be in the thick of the ad-sales action

The A in the new AOL may as well stand for advertising. That's the message from a Sept. 17 announcement that Time Warner's (TWX) Internet arm will shift its headquarters from Dulles, Va., to New York, home of Madison Avenue and the world's largest advertising agencies and media buyers. AOL also will combine several recently acquired companies with its own to form a single business called Platform A.

Just 13 months ago (BusinessWeek, 7/31/06), AOL announced it would give away the e-mail and other subscription Web services that supplied an estimated 75% of its revenue, opting instead to become an ad-supported online destination, akin to Yahoo! (YHOO) and Microsoft's (MSFT) MSN network. But it's not enough to depend on ads placed on AOL's family of sites. So, like many Internet companies, AOL is becoming a distributor of advertisements for placement on sites scattered across the Web. "We realized very early on that there has been a shift in the marketplace away from display advertising on the portal," says Chairman and Chief Executive Officer Randy Falco. "There are more and more Web sites out there, and advertisers are looking for more and bigger touchpoints on the Web."

Marketers are expected to spend more than $20 billion online this year. Portals such as Google, Yahoo, AOL, and MSN still capture the majority of that revenue, according to a March, 2007, report by eMarketer analyst David Hallerman. Together the portals grabbed 57.4% of the entire online advertising market, with Google accounting for about 25%, Yahoo 18%, and AOL 7.5%.

However, as marketers have grown more accustomed to online advertising, many want to reach a far broader audience than they'll find on a single site or even a portal that serves as an entryway to various services and sites. In August, AOL said second-quarter growth in the portal ad business had slowed to 16% from 40% in the previous period. Executives attributed the slide to advertisers shifting budgets to online ad networks, which are capable of distributing ads to a wider range of sites.

Acquiring Ad Networks

AOL's benefited from the shift, posting growth of more than 30% for the quarter ending June 30. "As have others in the industry, we've seen advertising demand shift recently toward third-party advertising networks," said Time Warner CEO Richard Parsons in an Aug. 1 call with investors.

To guard against declining revenue on their owned and operated sites, all the major portals have acquired ad networks (BusinessWeek, 5/21/07) that enable them to deliver ads on popular sites throughout the Web as well as better capitalize on the information they have on their users' surfing habits. AOL's recent purchases (BusinessWeek, 7/24/07) include behavioral advertising network TACODA as well as video ad service Lightningcast and mobile ad network Third Screen Media. With those and other businesses under the same roof, AOL can track user behavior and then more strategically place ads anywhere reached by the family of ad networks.

AOL's move to New York puts it squarely in competition with Yahoo, Google, and Microsoft, all of which have New York offices and are vying to bring advertisers into their networks. It also puts the company in the sights of established New York media companies that are scrambling to convince those same Madison Avenue executives that they need to keep spending money in print publications, on television, and on the radio. "The question is, who is going to control the television dollars and the print dollars in the future?" asks TACODA founder and Chairman Dave Morgan, who has since moved to AOL.

Do Tough Times Favor the Web?

Difficult economic times could help spur the shift from TV and print to online, says eMarketer's Hallerman. Instead of spending money on media where the effect of advertising is more difficult to track, marketers under pressure to justify budgets may opt instead for online ads, where they can show numbers for how many people clicked on an ad, signed up for a newsletter, or carried out a purchase. "When times are tough, managers need to be able to prove their return on investment better," says Hallerman. "At this stage the Internet offers move provable ROI than print or television."

That's the point AOL will make in Manhattan. Ron Grant, president and chief operating officer, says the company is ready to take on Madison Avenue. "Our competition is anyone who sells advertising," he says. "We are going aggressively after a shift."