Ad Growth for AOL Called Vital to a Remake
Just over a year ago, AOL unveiled a radical plan to remake itself into a business built on advertising from one driven by Internet access subscriptions. — To a great extent, AOL had little choice in the matter.
Context & Ripple Effects
This story is the one-year checkpoint on AOL's plan for a clean break from its Internet-access subscription base, announced in July 2006. Since then the company has largely completed cutting 5,000 jobs — 26 percent of its work force — by December 2006, bought video search startup Truveo back in December 2005, tested a blog-influenced overhaul of its news portal in June 2007, and launched a local search beta.
The Times' framing matters because of what the traffic numbers do and do not buy: under Nielsen's new methodology AOL and Yahoo vaulted over Google among top online destinations in July 2007, yet a June 2007 attempt to court upfront buyers alongside Yahoo failed to steer meaningful TV ad budgets to the portals. Audience scale alone is not yet paying the bills, which is why ad revenue growth is being called vital rather than merely desirable.
First-order effects
- AOL's cost structure now leans on the ad side of the ledger: with 26 percent of staff already cut, any shortfall in advertising revenue growth leaves the remake underfunded rather than merely delayed.
- Time Warner must judge the unit on ad-line momentum instead of subscriber counts, raising the stakes on every portal, search, and video product launch AOL fields.
Second-order effects
- The failed upfront push with Yahoo forces AOL to compete for display dollars on inventory quality and targeting rather than borrowing TV budgets, putting pressure on pricing across portal ad slots.
- Rivals reading the same Nielsen rankings face a peer whose audience reach exceeds even Google's under the new methodology, sharpening competition for the brand advertisers who have not yet shifted spend online.
Third-order effects
- If the pattern holds, legacy access businesses are structurally converting paid subscriber bases into free, ad-monetized audience platforms — with the parent company's willingness to keep funding the transition contingent on ad growth each quarter.
- Persistent failure to move TV money online would push portals toward performance-based formats and acquisitions of ad-targeting capability, as the Truveo deal foreshadowed, rather than relying on upfront-style brand selling.
The trend: Dial-up-era access companies are remaking themselves as ad-funded audience platforms, and the market is shifting its judgment metric from subscribers to quarterly advertising revenue growth.