On The House:


Media Conglomerate Is Its Own Top Ad Customer

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NEW YORK (AdAge.com) -- AOL Time Warner, the biggest media conglomerate, is the nation's third largest advertiser. So who is its
AOL Time Warner Co-Chief Operating Officer Bob Pittman: 'We turned on the fire hose' of in-house promotions for movie releases.
top advertiser? AOL Time Warner.

No one can accuse the media giant of failing to harness the power of its cross-promotional activities, a key benefit that company executives trumpeted in selling through the January 2001 merger.

Of the $5 billion AOL Time Warner said it spent on advertising last year, company figures show it "spent" $468 million on ads across its media portfolio (vs. just $14 million in pre-merger 2000) -- equivalent to 5.5% of the $8.5 billion AOL Time Warner reported in advertising and commerce revenue. On its properties, AOL Time Warner outspent General Motors Corp., the nation's No. 1 advertiser.

As consolidation has swept media and entertainment to create a handful of companies that are both giant media sellers and big buyers, it's a given more ad dollars will end up staying home.

House ads: big business
But no company embraces the concept as aggressively as AOL Time Warner, which, via its size and asset mix, typifies how the simple house ad of yore -- recall the astronaut promo that MTV made famous -- has become big business.

Few question the wisdom of intracompany

advertising. The question is how much house advertising is too much -- and how often these "buys" wouldn't fly if real money were involved.

AOL Time Warner and its megamedia rivals factor intracompany deals out of its total reported ad/commerce revenue, though not all of those rivals disclose it in such detail.

Viacom (CBS, MTV, Paramount), the No. 2 media company, reported 2001 revenue of $23.2 billion, up 16%, after intracompany "eliminations" of $748.3 million, up 81%. That figure includes non-advertising revenue, such as payments Viacom networks make to run syndicated shows produced by Viacom units.

A Viacom spokeswoman said most of the intracompany increase came from sales of Paramount's syndicated shows to siblings Nick at Nite and The National Network. "Advertising is a very small part of it," she said.

Viacom and Disney
An Advertising Age analysis of 2001 data from Taylor Nelson Sofres' CMR showed that Viacom was the fourth-largest advertiser for total measured ad spending last year at four Viacom cable networks, MTV, Nickelodeon, VH1 and The National Network.

The annual report filed with the Securities and Exchange Commission by Walt Disney Co. (ABC, ESPN, Disney), the No. 4 media company and No. 8 advertiser, said it subtracts intracompany transactions but didn't specify the value.

CMR data show Disney last year ranked as the No. 7 advertiser on ABC.

A Disney spokesman said the company is not required to break out its intracompany revenue.

Fox Entertainment Group, the U.S. arm of Australian company News Corp. and parent of Fox Broadcasting and 20th Century Fox, and French giant Vivendi Universal (USA Networks, Universal Studios) handled their intracompany transactions in a similar fashion.

Boosting movies
At AOL Time Warner, Co-Chief Operating Officer Bob Pittman credits such ads with spiking ticket sales for hit movies like Harry Potter and the Sorcerer's Stone and Lord of The Rings: The Fellowship of the Ring.

"Then you got a movie like Cats and Dogs," said Mr. Pittman. "In one of the CEO meetings" -- which the company holds twice a month -- "[Warner Bros. Chairman-CEO] Barry Meyer said, 'I got this movie that tests well if people see it, but my research tells us no one is going to see it.'"

"Then we turned the fire hose on that one, and it opened No. 1 on its opening weekend," Mr. Pittman said.

Another benefit the company proudly flogs: The million subscriptions America Online generated for Time Inc. magazines last year -- which, while but a small percentage of its 30 million-plus subscriber base, is a welcome relief to publishers.

How much is too much?
How much cross-promotion is too much?

Ad Age's analysis of 2001 data from CMR, Nielsen/NetRatings and the company's own statements revealed that AOL Time Warner was its own largest advertiser. Its ad spending accounted for 5.2% of $5.9 billion in

See related charts: AOL Time Warner In-House
U.S. measured ad spending across 40 of its key magazines and five cable networks, according to CMR data.

A Nielsen/NetRatings analysis of banner ads on AOL Time Warner sites found the total percentage of intracompany ads steadily rose throughout 2001, peaking at 43% in December before falling off again in January. (AOL is not alone. Nielsen/NetRatings' data show an online competitor, Microsoft Corp.'s MSN network, consistently topped AOL's percentage of intracompany ads, although Microsoft has a much narrower portfolio than AOL Time Warner.)

Asked about Ad Age's analysis that AOL Time Warner is its own top advertiser, a company spokeswoman said: "We think it's a very good business decision. It builds brands."

CNN: 20% house ads
During a recent eight-hour chunk of CNN programming, one in five commercials (excluding self-promotion) came from corporate brethren.

The spokeswoman, while declining to comment on specific ad spending levels, said, "We think it's smart business. We're certainly going to continue that kind of cross-divisional advertising."

As for CNN's intracompany ad ratio,

she said in an e-mail that an eight-hour chunk of siblings The WB, Cartoon Network, TBS or TNT would show a viewer "a variety of ads for an equally wide range of AOL Time Warner brands and services."

Or, as Mr. Pittman put it: "In a world like this, frequency matters."

Raised eyebrows
Others sound more dubious. "You can't blame the company," said Jordan Rohan, an analyst with Wit Soundview, "but it does raise some eyebrows if [intrasegment revenue] does get up above 20% of ad/commerce revenue" -- as it has in some analyst estimates of America Online's ad revenue.

While cross-company revenues are subtracted from consolidated company results, they're often included in segment revenue tallies. That means business units get a boost when they "sell" ads to siblings. In a report to investors, Holly Becker, an analyst with Lehman Bros., raised concerns about how AOL's take of cross-segment ad revenue is propping up results. The unit's reported ad/commerce revenue fell 7% in the fourth quarter and rose 13% last year. Factor out intracompany ads, Ms. Becker said, and AOL's actual ad/commerce revenue fell 26% and 4%, respectively, for the quarter and year.

60% go to AOL
America Online, having bought Time Warner, is getting a payoff in one regard. In a conference call with analysts, Wayne Pace, company's executive vice president and chief financial officer, said 60% of intracompany ads went to AOL. Mr. Pittman said the strategy is working.

"All I can tell you is [AOL] really did concentrate a fair amount of its budget inside of AOL Time Warner," he said. "And their unaided brand awareness -- which I think is the best measurement of brand value -- rose to an all-time high by December. So something went right."

In its fourth-quarter earnings release, AOL Time Warner noted cable ad/commerce revenue grew strongly in the fourth quarter and full year "as a result of intercompany promotions and increased advertising sold in conjunction with the launch of new channels."

Not all analysts share Ms.

Becker's concerns. "In a difficult economic environment, the best thing to do is eat your own cooking," said Chris Dixon, a UBS Warburg media analyst. "Why not use your own inventory? First of all, you're absorbing [excess] inventory, and you have to advertise and promote anyway."

Dollar not a dollar
A precise accounting of advertising within companies gets tricky, since a dollar does not always equal a dollar when it comes to intrasegment advertising. Executives at Time Inc., for instance, spoke of an internal "house rateî" at around 50% of standard ad rates.

An AOL Time Warner executive said monies rarely changed hands, and that accounting for the transactions was dealt with at the divisional level. A Time Inc. executive reported that one specific AOL-related promotion was essentially paid for at cost.

"If I'm CNN, and I carry AOL 7.0 ads, some kind of money changes hands, but not real money," said Tamara Gaffney, an analyst with Nielsen/NetRatings. "But there is some sort of allocation of dollars to make up for the costs of those ads."

For his own part, Mr. Pittman demurred on the compensation issue. "Do we send checks? I have no idea," he said. "It doesn't matter. It's all staying in one place."

Movie promotion
Movie promotion -- particularly on intracompany TV properties -- is a somewhat different matter. It's a difficult consumer product, with media plans constantly changing even on a daily basis, and one key movie executive insisted no in-house discounts applied to his intracompany marketing.

"No. It doesn't happen. It never has," said Arthur Cohen, president of worldwide marketing of the Motion Picture Group for Viacom's Paramount Pictures. "If I have to buy [CBS'] CSI or Letterman, I have to pay the same rate as everyone else does. I have to open the movie -- and the movie has a demographic and I have to show it to that demographic. When I buy time on [Viacom siblings] CBS, MTV or VH1, I have people that go fight it out with them."

Saving real money
For AOL Time Warner, house advertising is saving real money. Mr. Pittman said in-house promotional spending saved his company "hundreds of millions of dollars" last year, and company data testify to the point.

AOL Time Warner said its ad and promotional spending rose last year to $5 billion from $4.7 billion the year before. But since its internal promo spending spiked so significantly, the amount it spent elsewhere declined to $4.5 billion from $4.7 billion.

So will tomorrow's house ad result in more money staying in one place?

"Is there an upside? Yes," said Mr. Pittman. "I hope we don't go down much" from the fourth-quarterís level.

But, he added, seemingly hinting the recession-racked market has led to higher levels of intracompany advertising, "when the ad market picks up, you're only going to have a limited ability to [cross-promote]."

Said Mr. Pittman: "I don't think we'd be a very good partner if we bump" other advertisers.

Mercedes M. Cardona and Wayne Friedman contributed to this report.

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