AOL's Attempt to Spruce Up Its Sites Washes Away Ad Revenue

Ad Impressions Drop, but So Do Page Views, in Tough Slog to Improve Business

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NEW YORK (AdAge.com) -- It's going to get worse before it gets better.

That's been CEO Tim Armstrong's message since he took the job of fixing sick patient AOL more than 18 months ago. Anyone looking for a glimmer of turnaround won't find much in the numbers. Early in the year AOL started cutting back ads in a bid to improve the user experience. But that spring cleaning has stretched into fall -- it's been cutting down ads, sprucing up content and hacking away at operating costs, all of which has had the two-pronged effect of lowering expenses as well as lowering income.

Credit: Source: ComScore data

To wit: in the most recent quarter, AOL's ad revenue declined 27% from the same period last year, while Yahoo increased its digital display revenue 17%, The New York Times Co.'s digital ad revenue grew 14.6% and ad network ValueClick saw a slight increase of 1.5% to $106.8 million. What gives?

Mr. Armstrong said the ad-revenue drop was largely "self-inflicted," meaning the company has purposefully pulled back on the amount of ads its sites have been serving in order to offer a cleaner user experience. An analysis of traffic and ad numbers show that while AOL is, in fact, serving fewer ads, it is also serving fewer page views, and the proportion of advertising hasn't changed much across its domestic websites over the last 12 months.

In September of last year, for example, the company served 12.4 billion ad impressions over 14.3 billion pages viewed, according to ComScore, a ratio of almost 8.7 ads for every 10 pages viewed. In September of this year, AOL served 9.9 billion ads across 11.8 billion pages served -- about 8.4 ads for every 10 pages viewed, which suggests that users may be experiencing advertising levels similarly to a year ago.

To be sure, AOL has steadily served fewer ads altogether over the past 12 months, with 20% fewer total ad impressions in September this year over September last year. But the company has also had fewer page views overall, down 17% in September vs. last year. Its audience is also down 9% over the past six months to 104 million monthly uniques, according to ComScore.

President of global advertising and strategy Jeff Levick said ComScore's data do not entirely match AOL's internal numbers. "At this point this year vs. last year, we took down 50% of the ad impressions," he said. "We cleaned up the user experience. By removing the number of units, we've seen higher engagement of advertising across our pages. That is the strategy."

Mr. Levick said the average time a user spent on the homepage has increased 18% year over year, per internal numbers. "Of course, it's better for users," he said, "but from an advertiser point of view, the way we see it, it's like saying, 'Would you like to share the stage with three other advertisers, or would you like to have it to yourself?'"

Part of that strategy involves the company's new ad units, one of which, dubbed "Project Devil," is a large new unit that includes several modules for content, images, video, Twitter feeds, Facebook integration and the like. It has already started appearing on AOL's Moviefone and Stylist sites, and will roll out to its redesigned homepage in the coming months.

AOL has repeatedly said it is sloughing off non-core assets, such as certain parts of its international businesses. Third-quarter domestic-display ad revenue is down 8% year over year, but up from the first quarter -- a stat Mr. Levick points out to illustrate investments are paying off.

In the meantime, Mr. Armstrong is preaching patience. He expects the company to have another rocky quarter, but expects revenue to start increasing by the second half of 2011: "I'll personally be very disappointed if I can't get that to happen."

More specifically, Mr. Armstrong said the company is looking to build and buy more profitable content verticals, which includes video; to exploit local opportunities through its crowdsourced-news division, Patch; and "to lock down AOL's 2011 advertising pipeline."

The company paid $120.2 million in cash and incentives for three acquisitions -- video-syndication company 5Min Media, web-software maker Thing Labs and tech blog TechCrunch -- underscoring Mr. Armstrong's strategy to build AOL into a content and distribution business.

But he warned observers that one of his fundamental rules of acquisitions is "no Hail Mary passes."

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