AOL's ad revenue grew a meager 2% during the quarter. Management said AOL's third-party ad business, Platform A, delivered "solid growth," which means the owned-and-operated sites, such as AOL Sports or AOL Finance, are likely the ones dragging down total ad revenue. Couple that with the fact that AOL's audience for those sites has actually grown year over year, and the picture looks even worse: The decline in ad revenue was apparently great enough to offset the growth in audience.
Cause for concern
Though the trend in online advertising appears to be toward growing massive ad networks -- and AOL has the largest in Platform A -- ad weakness on AOL content properties is troubling if one considers that advertising on owned-and-operated sites is a lot more profitable than on its third-party network, where a part of the revenue has to be shared with publishers (known as traffic-acquisition costs). Incidentally, Yahoo reported the exact opposite in its recent second-quarter earnings: Revenue on its owned-and-operated sites was up 14%, while revenue on its affiliate/network sites was down 4%.
Overall, Time Warner's net income was $131 million or 9 cents per diluted share, down from $161 million or 11 cents per diluted share for the year-ago period.
Entertainment and networks continued to be Time Warner's bright spots, with revenue up 14% and 9%, respectively. Publishing (Time Inc.) was down 6%, thanks to a 9% decrease in ad revenue. Subscription revenue, however, was actually up 1%, and online ad revenue, led by People.com, Time.com and CNNMoney.com, helped to offset some of the print declines.
Trailing the pack
Indeed, it's a bit perplexing that AOL grew ad revenue by only 2% over last year, when the online ad industry as a whole is expected to grow in the mid double digits by any number of revised-down estimates. Mr. Bewkes reiterated the explanation he gave last quarter about AOL's slower ad growth: It takes time to integrate the myriad acquisitions AOL has made over the last 18 months, including Tacoda and Quigo, and that has created a drag on revenue. He said there was also significant weakness in display inventory, specifically in the autos, financial services, telecom and travel categories -- some of which was due to integration as well as broader economic trends.
In better news, "We've made substantial progress since [last quarter], particularly this month during the recent period," he said. "Platform A is fully integrated and that's across sales, marketing, operations and engineering, and we've fully integrated Tacoda and Quigo targeting technologies, [by] which we can offer access to the AOL network and inventory across the third-party network."
He said benefits should pay off in second-half 2008 results. AOL's overall revenue was dragged down by its declining internet access business, which Time Warner has now separated from its content business -- a move that gives the company more flexibility to spin it off.