42% ad revenue decline: AOL's uphill battle

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The Securities and Exchange Commission has launched a probe of its advertising accounting. Rival MSN is moving in on its customers. The CEO's office is vacant. The broadband Internet strategy is murky. Subscriber growth is sluggish. Ad revenue has plunged.

And America Online's top advertising and marketing executive is charged with the unenviable-some would say Sisyphean-task of revamping the service's sales strategy to stem the decline.

When parent AOL Time Warner reported earnings July 24, the AOL division turned in the worst performance in the company. The service's ad and commerce revenue crashed 42% last quarter to $412 million-or $362 million after revenue from AOL Time Warner siblings is factored out.

secure spot

The April 22 appointment of Bob Sherman, former president of Time Warner Cable Advertising Sales, to president of AOL Interactive Marketing was perceived as a positive for the online giant, bogged down as it is by the steep decline in online ad revenue. Now it is up to Mr. Sherman to boost the unit's sagging fortunes.

Although he was installed by ousted AOL Time Warner Chief Operating Officer Robert Pittman and had no existing relationship with his new boss, Don Logan, insiders believe Mr. Sherman's position is secure. That theory will be tested when AOL Time Warner Chairman Richard Parsons and Mr. Logan, newly named chairman of the Media & Communications Group, install a new CEO at AOL.

The company hired a headhunter to explore outside candidates for the CEO spot, but is also considering a tight group of internal candidates, including Time Inc. Exec VP Michael Klingensmith and Jimmy de Castro, AOL president-interactive services and Mr. Sherman's boss.

"Sherman is held in high regard. He has pretty good equity in other parts of the company," said Larry Goodman, president, CNN sales and marketing, who serves with Mr. Sherman on AOL Time Warner's Ad Council.

`sensible' to anyone

Mr. Sherman expressed confidence the changes he has initiated will stick regardless of the management shifts. "I believe very strongly that what we've accomplished in the last eight weeks in this reorganization is consonant with the very best practices that I've been able to learn over the last 30 years running advertising and subscription businesses," he said. "That makes me believe that these changes will be sensible to any new management team."

In an earlier interview, Mr. Logan said the AOL CEO search "will take as long as it takes" and that after it is decided, "we can go forward." In AOL Time Warner's earnings call last week, Mr. Parsons said the unit's CEO will be named "shortly."

Mr. Sherman has already retooled AOL's ad sales organization, which focused on vertical industries such as automotive, fast food and retail. Mr. Sherman replaced that organization with a more traditional regional sales structure to enable more frequent client contact and improve accountability on the part of both the sales and account teams. He's also moved to streamline internal processes in order to reduce the number of steps and points of contact marketers and agencies must encounter when dealing with AOL, and has begun tackling the pricing of media and marketing programs.

a `dare' to do business

"We're taking a close look at pricing. We ought to be at the very high end of the bell-shaped curve, if not a little bit beyond in the [media] business," Mr. Sherman said. "We were unfriendly in our offerings to the media community, our prices were probably too high, they were almost disdainful of the marketplace," he continued, adding, "We almost dared people to do business with us."

Mr. Sherman and Lon Otremba, a former Time Warner Cable executive installed by Mr. Sherman to coordinate processes within the unit as exec VP-AOL interactive marketing, said they want AOL to be more customer-focused and client-friendly.

To that end, Mr. Sherman and his team hit the road over the last three weeks meeting with marketers ranging from McDonald's Corp. and Citigroup to Travelocity and Samsung Electronics in a bid to allay concerns and communicate that AOL wants to be a good business partner. AOL, Mr. Sherman said, wants to structure deals that meet the marketer's needs, not just its own.

"He's clearly aligned things in such a way that it's better [and] going to benefit McDonald's," said Neil Perry, senior director of national marketing, McDonald's. "There's a real feeling that AOL has immersed itself in our business."

McDonald's has done business with individual units of AOL Time Warner including AOL, which has served as its main point of contact in discussions with AOL Time Warner executives to craft a cross-media arrangement. "We are making great progress on what it might be and what it might look like, but it's not there yet," said Mr. Perry of the year-long process, adding that a deal was at least three or four months away.

Mr. Perry doesn't see the SEC probe as an issue that will stall talks. "It is my understanding the SEC is doing an investigation of AOL's accounting practices, and that they have not charged them with any wrongdoing," he said.

Other marketers said they would closely follow the SEC probe. "In all honesty, I will keep abreast of the process of this investigation. But if I were in a relationship with [AOL Time Warner] at this time, I wouldn't stop the process or the negotiation, though certainly I would be a fool not to keep track of what's going on there," said Kurt Graetzer, CEO, Fluid Milk Processor Promotion Board, a consortium of U.S. milk producers. "They are simply too important in the field. They have an extraordinary base of users and there is loads of opportunity there."

a port in a storm

Marketers with whom Mr. Sherman and his team have met have expressed confidence in his demeanor amid the swirl of uncertainty at AOL. "[Bob] Sherman has been very good about listening [to us] about what our issues have been. He's a quick read," Mr. Graetzer said. MilkPEP had a $9 million marketing program with Time Inc., Time Warner cable properties and AOL last summer. But the deals were struck with individual units and not as a package deal, which suited Mr. Graetzer, who experienced flameouts with two previous multiplatform deals with AOL Time Warner. "They [the individual units] still do a very good job for us, they are still strong partners, but don't even think about bundling up this media unless you thoroughly understand and can provide a service to the client," Mr. Graetzer said.

Rishad Tobaccowala, exec VP, Bcom3 Group's Starcom MediaVest Group, agreed, maintaining that smaller deals are more viable and that combining the right properties, for example, the WB's Cartoon Network and CartoonNetwork.com, make more sense to achieving marketer goals. "In the new world, you can't approach things with just scale as the answer."

Sam Gilliland, president-CEO, Travelocity, sensed a new attitude of partnership on AOL's part. The online travel service is halfway through a five-year, $200 million marketing and media relationship with AOL.

"The good news is that it appears as though they are very much interested in taking the relationship to the next level," Mr. Gilliland said, alluding to the potential to work with AOL on database management programs.

Ominously, America Online's backlog of advertising deals has fallen precipitously. In October 2000, AOL reported a backlog of $3 billion in ad deals, representing future revenue. AOL last week said the backlog now is $860 million. Meanwhile, the status of several cross-company deals with marketers hangs in the balance, along with the structure and leader of the Global Marketing Solutions Group, the internal body charged with implementing mega-deals.

"To date, an unfortunate set of circumstances have worked against AOL in working big deals and that is that many advertisers still separate digital [media] planning from traditional [media] planning, particularly the consumer package-goods companies," said Maggie Boyer, VP-media at digital agency Avenue A, Seattle. "Today, as an agency, we're a little bit confused. Who do I call, the agency relations or the sales folks? It's not altogether clear to us. Who's able to make change happen for me?"

For his part, Mr. Sherman believes that cross-platform work holds promise, however: "We can restructure until the cows come home ... and if we aren't an organization that people trust and can rely upon, we're kidding ourselves."

contributing: jon fine

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