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ADS COMING SOON TO AOL MARKETING PARTNERS TIME INC., HACHETTE LEADING THE CHARGE

By Published on .

Receptionists at America Online's offices in Vienna, Va., are trained to tell those who ask that the computer service does not accept advertising.

But not for long. Spurred on by such ad-supported marketing partners as Time Inc. and Hachette Filipacchi Magazines, America Online is poised to begin testing ads on its system as early as this summer.

The fastest growing of the major online services, America Online has seen its subscriber base nearly triple over the past year to 700,000. President-CEO Steve Case said he wants to get close to the critical 1 million mark-expected by fall-before actively pursuing ad sales.

But in a critical year for online services, America Online's gains have been repeatedly overshadowed, first by serious subscriber access problems and more recently by published reports speculating that the company might be sold and that its largest shareholder, Paul Allen, is considering dumping his 18% stake.

Mr. Case said he doesn't believe the negative press will affect subscriber growth but fears it could interfere with his aggressive efforts to link up with newspaper and magazine publishers and TV networks for content.

Subscribers "don't care about this. They don't even know the debate is happening," he said. "The area where there's some concern is with our partners. It might give them pause if they think we're going to be sold to one of their competitors."

One recent report had media giant Time Warner interested in acquiring America Online, a deal that could spook potential partners. Mr. Case said the company is "not conducting any discussions about being acquired"; Time Warner executives also denied the rumor.

America Online's partners-including Time Warner, Hachette, Tribune Co., The New York Times Co. and Cable News Network-have been critical to the service. Mr. Case uses their editorial expertise to gain content and will now use their marketing savvy to enter the ad business. Still, he remains very cautious about introducing ads on the system.

"You need to really take a fresh approach, since this is a new medium, and try to create services that subscribers find value in and don't necessarily see as advertising," he said. "The initial tip-toeing into that area will happen in conjunction with our partners."

Mr. Case won't discuss details but said he hopes to develop advertising that's less persuasive and more information-oriented.

Other online services have taken different approaches. Ads on Prodigy are intrusive, appearing in strips along the bottom of the computer screen, while CompuServe's advertisers are confined to an electronic shopping mall.

America Online's publishing partners are eager to introduce ads on the service so they can develop added-value programs and cross-media packages for their print advertisers.

Dick Duncan, executive editor at Time overseeing the weekly's online edition, said the magazine is developing a "separate icon for ads" that will appear on editorial screens. Subscribers will need to click on that icon to gain access to the actual ads.

Mr. Duncan said Time's sales force has already identified several interested advertisers and he expects to begin testing ads on the service this summer.

"Interactive advertising is going to be a whole different kind of animal, and we don't want to confuse it with old-fashioned image advertising," Mr. Duncan said. "As long as it's a matter of choice and does not interrupt the user's flow, that's how we think it ought to be."

Hachette, too, wants to run interactive ads on the online editions of its magazines. Road & Track and Flying are already available on America Online and Car and Driver, Popular Photography and Stereo Review are due to be added by the end of the month. Hachette plans to bring other titles online in the second half of the year.

"Most of the online services haven't been advertising-friendly in that the advertising space they've included on the screen hasn't necessarily been visually appealing," said Mario Cooper, VP-Hachette Filipacchi Multimedia. "We're tweaking the [America Online] system for creative advertising space."

Despite Hachette's urging, no ads appear yet in the electronic versions of Road & Track and Flying. Mr. Cooper says Hachette and America Online are still in discussions.

One America Online marketing partner who asked not to be identified said he is amazed at how slowly the service has moved to embrace electronic advertising.

"You'd think that [because it is] the hottest online service, they would have been there already. But they're not," he said.

So far, the sale rumors and access problems have not led to a backlash from America Online's partners. Time's Mr. Duncan claims the media attention is proof that America Online "is a high-profile, hot product."

But Mr. Case's concerns about the impact of rumors prompted him to release a prepared statement last month-on the day before one newspaper story appeared-denying the company would be sold and insisting it needs to remain independent to continue forging strategic alliances.

Mr. Allen's plans are another question. The billionaire co-founder of Microsoft Corp. is said to have grown frustrated in part because America Online hasn't granted him a seat on its board.

Mr. Allen hasn't commented on whether he is considering selling his stake; Mr. Case said only that Mr. Allen is "a passive investor. He can buy more stock or sell stock, [but] there's no evidence he's doing anything."

Analysts have already put a high value on America Online, and the company has a "poison pill" plan in place that could make any unsolicited takeover attempts very costly.

There's little question that as the only independent player among the established online systems, America Online is an attractive takeover target for traditional communications companies interested in gaining a foothold in interactive media.

"The logical people to be in this game are the phone companies, the cable companies and the major publishers who have content that could be distributed on this network," said one executive with ties to America Online. But, he added, "Speculation about this company has gone on forever. It will continue to evolve and it will continue to be a good company."

Debra Aho contributed to this story.

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