Tough road: Framework for AOL's future fails to placate the market

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Jonathan Miller was surprised. The newbie chairman-CEO of America Online didn't anticipate analysts and the media who gathered Dec. 3 to hear his presentation of AOL's future course would react so badly to news of the beleaguered division's projected drop in ad and commerce revenue by as much as 50% in 2003.

"We knew we were getting up there to say something that people didn't particularly want to hear, in terms of results, but at the same time, the advertising issue, the prior-year commitments had been there [all along]," Mr. Miller told Advertising Age in a telephone interview.

AOL Time Warner's stock took a drubbing after the presentation, in which Mr. Miller outlined AOL's plans to aggressively market a high-speed broadband service furnished with original content from sibling units such as Time Inc., CNN and Warner Bros. AOL also plans to launch a "Liquidation Marketplace," with discounted products, as well as an array of paid services.

Wall Street remains concerned about AOL's gloomy 2003 forecast and skeptical about whether it has the wherewithal to become dominant in an increasingly broadband world. AOL Time Warner stock plunged 14% the day of Mr. Miller's presentation; the stock has fallen 70% since America Online bought Time Warner in January 2001.

Reiterating earlier statements that 2003 represents the bottom of AOL's ad-revenue performance, Mr. Miller said AOL has only just begun to sell "real advertising," alluding to "overhang" from previous ad and commerce deals. Some of those deals are being investigated by the Department of Justice and the Securities and Exchange Commission in light of allegations of improper accounting.

"By the end of 2003, we're really into a different period," he said, adding, "We're actually selling more [advertising] now and will sell more in 2003, but we do have this overhang," which, Mr. Miller explained, consists of about 15 deals.

Mr. Miller declined to speculate what the AOL revenue pie might look like in 2003 vs. 2002, i.e., what percentage of revenue it would derive from dial-up subscriptions, broadband "Bring Your Own Access" subscriptions, paid listings and commissions, or add-on premium content.

waiting on change

The pesky ad/commerce revenue category catchall, in which ad revenue is lumped in with commerce revenue, will remain in place at least until yearend 2003. "We can't change it until we can change the prior [ad] commitments," he said.

Yet another AOL course correction poses hurdles for the ad-sales team, which has worked to restore credibility with marketers in a year of significant turmoil and turnover. "For the past six to seven months we have been focused on building a different type of sales organization that is focused on marketers' needs," said Bob Sherman, president, AOL Interactive Marketing, the unit's ad-sales arm.

Even so, marketers trying to do business with the biggest online provider are antsy. "We've had such a hard time getting proposals from AOL, they have a tough time executing rich-media programs. ... They want to create a service that makes them an easy-to-do-business-with kind of company, but they just can't seem to get there," said one fast-food marketer.

"We are getting there, we've made substantial progress ... advertisers ought to hang in there," Mr. Sherman responded. AOL Interactive Marketing recently laid off 90 ad-sales staffers, or about 14% of the Interactive Marketing unit employees. (The cuts were restricted to ad-sales representatives selling local ads.)

To be determined: how Time Inc. titles providing original content to AOL, among them Entertainment Weekly, InStyle and Parenting, will be compensated for contributions, AOL Time Warner insiders said.

While AOL Time Warner siblings heretofore have had strained relations, they're now charged with playing in the same sandbox. The impetus: boosting the stock price.

Company division heads "realize that there is only one real way through, and that's to get better results and deliver on them on a consistent basis," Mr. Miller said.

contributing: bradley johnson

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