AOL's Ray of Light: Display Ads Started to Grow Again

Profits Hit Hard By $28 Million In Restructuring Costs With Huffington Post Deal

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Amid AOL's crashing revenue and profits, a bright spot: the business upon which it is staking its future -- online display ads -- actually grew a little in the past quarter for the first time since 2007.

Overall revenue fell 17% to $551.4 million with total ad revenue (including search) down 11% to $313.7 million. But CEO Tim Armstrong keyed onto the company's display ad performance, which bottomed out after years of decline and climbed 4% to $130.4 million for the quarter. U.S.-based display did a little better, climbing 11% to $122 million.

That upswing lags the 14% overall growth eMarketer is predicting in the display market this year. AOL's share of spending is also expected to decline, according to eMarketer, to 4.4% from 5.3%, while Facebook grabs 21.6% of the market. But it's the first positive sign on the balance sheet in a while for the beleaguered web company, which spun out from Time Warner in 2009 and which Mr. Armstrong is attempting to transform from its roots in dial-up internet access to a pure-play content company.

"On the advertising side, let me underline, we've had our first growth in display revenue since 2007," Mr. Armstrong told analysts Wednesday. "We moved 65% of our ad impressions off our service last year to get more quality revenue, and considering that , this growth is tremendous."

Hitting profits in the quarter was an additional $27.8 million spent on integrating The Huffington Post on top of the $315 million sticker price. Along with costs related to the company's Patch division, AOL's profits plunged 86% for the most recent quarter, dropping to $4.7 million from $34.7 million in the first quarter last year.

In acquiring the Huffington Post, Mr. Armstrong cut overlapping editorial products -- AOL Finance and AOL News among others -- but he also acquired Huffington's low-cost model. As editor-in-chief of the Huffington Post Media Group, which includes all AOL content properties, Ms. Huffington has eschewed the use of freelancers and has instead invited anyone to plug into its blogging platform, meaning writing for free. It's a model that has garnered criticism from the ranks of traditional journalists and writers, but it has long been the underlying media principle behind the Huffington Post.

Mr. Armstrong has granted Ms. Huffington authority to apply that structure across AOL's editorial divisions, including Patch. "We believe in journalism," he said Wednesday, referring to AOL's plans to expand Patch into 1,000 towns altogether this year. Under Ms. Huffington's direction, Patch will maintain one editor per town but is dissolving freelance operations. Instead it is inviting local bloggers into its open blogging platform.

Display advertising, meanwhile, has been taken over by the AOL side of operations headed by ad chief Jeff Levick. The company has spent significant resources developing and selling its Devil ad units, which feature rich media elements like video and catalog items that people can purchase via the ad. AOL began selling these units on its own properties late last year, and it recently entered into an agreement with Hearst, which will be selling Devil on its own sites like Cosmopolitan and Esquire. Hearst will only pay AOL an ad serving fee in this partnership.

AOL hopes the Devil units will appeal to brand advertisers, much the way that Vogue magazine appeals to major fashion and beauty companies. "People buy Vogue because they want to read the ads as much as the content," Mr. Levick told Ad Age recently. "That's exactly what we want to do."

Mr. Armstrong is banking on Devil for AOL's now lengthy turnaround but neither he nor his executives would comment on projected revenue from Devil this year. He does expect the company to see an uptick in revenue in the latter half of 2011. "Our expectation is we're going to optimize the business and consumer experience which will benefit the bottom line later this year," he said.

Expect to see more online video, according to Mr. Armstrong, who said there's more opportunity in that space for advertising. In the early part of this year AOL bought Goviral for $98.7 million, a video ad serving platform for Europe that works much like 5min, which AOL acquired last year.

Although Mr. Armstrong continues to profess his "no hail Mary passes" policy toward new purchases by the company, he said AOL "will always be opportunistic when it comes to possible acquisitions."

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