AOL Struggled With Ad Revenue in Second Quarter

Results for Time Inc., Cartoon Network Cloud Strong Period at Time Warner

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NEW YORK ( -- Time Warner saw second-quarter net income rise 5.2%, but analysts noticed that the giant media conglomerate encountered some turbulence growing ad revenue at its AOL unit. Meanwhile, executives noted that upfront sales at the company's Turner networks were robust, except at Cartoon Network, where sales of ads as part of the "kids' upfront" were weaker.
Time Warner CEO Richard D. Parsons
Time Warner CEO Richard D. Parsons Credit: AP

At AOL -- which the company has rejiggered from from a paid-subscription internet service to a web portal to compete with the likes of Yahoo and MSN -- overall revenue declined 38%, or $774 million, to $1.3 billion, owing to a 55% decrease in subscription revenue only partially offset by a 16% increase in ad revenue. One analyst, Sanford C. Bernstein's Michael Nathanson, had expected better ad performance and noted that display and search advertising had been much weaker than he expected in the quarter.

changes in web traffic patterns
In a conference call with investors today, Time Warner CEO Richard D. Parsons explained that ongoing improvements to AOL caused short-term changes in traffic patterns, as users grow accustomed to new features and advertisers take a wait-and-see approach to reworking of key sites. He also said a shift by marketers to use of third-party ad placement networks was putting some pressure on display advertising. "We are stepping back from our expectation that AOL will grow its advertising at our above-the-domestic-industry growth rate this year," Mr. Parsons said.

In discussing TV networks, Time Warner executives said the company's Turner outlets had generally fared well in the recent upfront market. TBS and TNT are expected to "be up in the high single to low double digits, and that's true of both pricing and of dollar volume," said Jeffrey Bewkes, Time Warner's president-chief operating officer.

Food marketers
One problem spot, he noted, was Cartoon Network, because "the kids' upfront is pacing lower than the prior year, and as a result, Cartoon Network will be the only Turner network that won't show improvement over the prior year," Mr. Bewkes said. The kids' upfront has run into trouble as big food marketers begin to pare back their spending on media aimed solely at youngsters due to heightened concerns about the role of marketing in contributing to child obesity.

Mr. Bewkes said the Turner networks would likely not make radical changes to ad breaks in response to commercial ratings guarantees that have become adopted in upfront negotiations. At the same time, TBS and TNT have devised unique ad pacts that include themed ad breaks and reduced the number of ads that run over the course of a long movie.

Revenue at TV networks fell 1% to $2.6 billion, reflecting an 11% decrease in ad revenues, offset partially by a 5% increase in subscription revenue. The ad-revenue decline was due to the cessation of the WB network's operations in September 2006, Time Warner said.

Digital plans for print
At the company's publishing segment, revenue of $1.3 billion was essentially flat with the year-earlier period. Ad revenue came in at $6 million, benefiting from higher digital revenue led by and, offset partially by declines in print magazine revenues. Mr. Parsons said the company's strategy for its publishing operations was to "focus on the titles in the magazine space that have and can have life in the online space, and we are focused on moving those brands into the online space and capturing the advertising dollars that are leaving the print space and enduing up in the online space."

The company's overall revenue grew 6% over the year-earlier period, to $11 billion.
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