AOL TO REDUCE DEPENDENCE ON ADVERTISING

New Plan Stresses Sponsorships, Transactional Revenue

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NEW YORK (AdAge.com) -- When America Online CEO Jon Miller presents his turnaround plan for the embattled unit of AOL
Jon Miller's plan is expected to shift the AOL business model.
Time Warner on Dec. 3, he is expected to articulate a framework that reduces AOL's dependence on advertising for growth, according to analysts and knowledgeable insiders.

35 million members
The business plan, the details of which Mr. Miller will discuss with analysts and investors, marks the CEO's first real test in what is likely to be a long process to overhaul the world's biggest portal. The former USA Interactive and National Basketball Association executive, who arrived at AOL in August, must lead a transition of AOL's 35 million members to broadband Internet and other subscription services amid a tepid economic climate, slowing growth and sagging ad revenue.

Mr. Miller's plans include launching new subscription services and original-content packages that leverage the assets of AOL Time Warner sibling divisions such as Warner Bros. Picturs and Music, Time Inc. and cable properties, executives said. Such content might include first looks at movie trailers or pre-releases of music singles and content excerpts.

AOL will try to offset declining ad revenues with subscription fees for broadband packages and a premium music service featuring exclusives. Gaining access to cable systems, including sibling Time Warner Cable, will eventually make AOL another branded channel of entertainment.

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Mr. Miller, through a spokesman, declined to comment.

"Miller is both a programmer as well as a business guy and he's made no secret of the fact that he loves the HBO model and would look to that," one AOL Time Warner executive said.

Commerce hub
Apart from subscription revenue, Mr. Miller is expected to offer details on a new commerce hub whereby AOL would derive transaction revenues. In doing so, the portal would conceivably compete against eBay, which is also a major advertiser on AOL.

"If AOL is going to be a marketplace for buyers and sellers to transact business, that's eBay's business and it has a strong competitive position in that business," said Shawn Milne, principal, senior research analyst, Soundview Technology Group. "AOL is going to be swimming upstream on this."

Advertising in the form of sponsorships of specific content areas and a more TV-style ad model are expected to dominate; AOL recently said it would eliminate pop-up ads.

"The sponsorship model that exists in the sports world is relevant, an identification with properties. ... That kind of relationship for an advertiser is much more meaningful," Mr. Miller told AdAge.com in an August interview.

Diverse revenue streams
Mr. Miller's plans hinge on creating diverse revenue streams, but AOL tried to dispel any notion that it would reduce the role of advertising on the service.

"AOL is, and will continue to be, an important medium for advertisers to communicate to the largest online audience in the world," said John Buckley, AOL executive vice president of corporate communications.

AOL reported third-quarter subscription revenue of $1.8 billion vs. $1.5 billion a year ago, while ad and commerce revenue were $320 million vs. $612 million for the same period in 2001. AOL projected that revenue from ad sales will plunge 48% this year. AOL has warned that ad sales for the third quarter could fall as low as $1.6 billion this year, down from $2.7 billion in 2001. Yet for the industry, online ad spending increased 15% in the third quarter from 2001, according to Nielsen/NetRatings.

Layoffs likely
Company insiders say reductions in AOL's ad sales force are likely. Bob Sherman, president, AOL interactive marketing, AOL's ad sales arm, declined to comment on the speculation, but said "advertising will continue to play an important role in maximizing the revenue streams available to AOL."

While growing other lines of business is critical, AOL wants to remain a major ad vehicle for marketers. Mr. Sherman and his team have huddled with AOL advertisers and their agencies to repair relationships and begin new ones.

An ally in the process, Mike Kelly, newly named president of AOL Time Warner's Global Marketing Solutions Group, said he is working with all the divisions to create "client-focused marketing solutions," adding that "clients are extremely interested in the interactive piece of any integrated package; there's no diminished role for AOL."

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