AOL tries to mend ad ways as market stirs

As the online-advertising market begins to show signs of resurgence, embattled America Online is struggling to catch the wave.

Company executives said in October that the worst may be over for AOL's withering ad sales, which fell nearly 50 percent in the third quarter compared with the same period a year ago. But recent moves in the Time Warner division suggest the company is still fumbling in key aspects of its turnaround plan, according to some online-advertising experts.

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What's new:
AOL executives have said the worst may be over for the company's withering ad sales, but recent moves in the Time Warner division could indicate that AOL is still fumbling in key aspects of its turnaround plan.

Bottom line:
The online-advertising market is beginning to show signs of a revival, but if AOL--and not just its rivals--is to benefit, its efforts to reform its advertising sales team must bear fruit.

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"AOL is trying to find itself," said Greg Smith, director of media practice at Carat Interactive, a New York-based agency. "It's trying to figure out what sort of a media company it is and how they're going to relate to consumers and advertisers."

The company faces setbacks on numerous fronts, with falling subscriber numbers, federal investigations into its accounting practices and corporate infighting with parent Time Warner. The division is responding with new managers and an updated version of its software aimed at courting subscribers to high-speed Internet services.

Reforms have also touched the advertising sales team, which was recently overhauled in a bid to shore up key relationships damaged years ago during the dot-com boom.

Among other things, AOL last month eliminated a special position created some four years ago to develop stronger ties with powerful advertising agencies. Now the company is passing responsibility for those relationships down the chain.

AOL hopes the move will improve relationships with agencies and their valuable clients by promoting direct dealings between media buyers and AOL sales staff.

The company is also making major changes aimed at streamlining its famously complex sales processes, according to Michael Barrett, AOL executive vice president of worldwide interactive ad sales, who has won praise from Carat Interactive's Smith and others for pioneering division changes.

First, AOL is complying with all standardized ad formats, so that marketers will have an easier time running media-rich and larger-sized ads that rivals such as Yahoo and Microsoft's MSN have accepted for some time. AOL has also begun to eliminate arduous contract processes--which in the past have required as many as five sets of signatures--replacing them with standard ad-insertion orders. It will now also accept agencies' ads from third-party ad servers that were previously barred.

AOL is also ironing out the kinks on selling ads across various media types, Barrett said. Right now, the company has four or five deals that span online and offline media. "We're thinking more like a media company, and we're trying to emulate Time and Turner more than Yahoo and MSN," said Barrett.

Such changes have been spurred by a breathtaking reversal of fortune for AOL, which once commanded the online-advertising market.

In the last financial quarter, online-ad sales declined by nearly 50 percent from last year, and analysts expect ad sales to be down by 33 percent in the fourth quarter.

"AOL is trying to find itself. It's trying to figure out what sort of a media company it is and how they're going to relate to consumers and advertisers." --Greg Smith Director of media practice Carat Interactive

The declines have come amid a chorus of criticism that AOL's advertising rates are overpriced and that sales representatives can be inflexible in negotiations. Though prices for various campaigns can vary widely, ad executives estimate that AOL charges up to three times more than rivals for its ads.

Agencies also criticize AOL's poor customer service, its complex paperwork, long response times to agency requests for proposals, and inventory and technical limitations.

"Working with AOL you still hear a lot of 'no,' whereas Yahoo and MSN have found ways to say 'yes'," said one online-advertising executive, who spoke on condition of anonymity.

Ad decline at the company has continued even amid growing evidence that the online-ad industry as a whole is undergoing a revival. Sales from online advertising hit an estimated $1.74 billion in the third quarter, a 20 percent increase from the comparable period in 2002 and the industry's fourth consecutive period of growth, according to trade group the Interactive Advertising Bureau and auditor PricewaterhouseCoopers.

AOL rivals Yahoo and MSN are touting profits also from the industry, thanks in part to search-related advertising.

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But AOL isn't isolated regarding its troubles in the industry. During the Internet heyday, Yahoo's ad sales team was known for youthful arrogance and inflexibility, and Yahoo sought to smooth out its formerly acrimonious relationship with agencies during the bust.

It started sponsoring regular summits for interactive-advertising agencies and devoted much to internet education and the development of standards. Yahoo's ad salespeople also became more accommodating and flexible when it came to formats and pricing.

The company recently reported a quarterly profit, buoyed by sales of search-related advertising from its partner and subsidiary, Overture Services.

Some industry analysts predict a similar turnaround for AOL, boosted by search engine revenue through a similar deal with Google.

Merrill Lynch financial analyst Jessica Reif Cohen expects that AOL will report revenue of $2.1 billion in the fourth quarter, a $200 million decline from the same period a year earlier. She also expects online-ad revenue of $180 million for the quarter, a decline of 43 percent from the same period a year before.

But Reif Cohen said she sees some promising signs as well: AOL has generated new U.S. ad revenue in each of the two prior quarters; that gives reason for hope and should offset declines from major ad deals it lost during the downturn. In the second quarter of 2003, it billed $75 million in new ad revenue, and in the third quarter, $90 million.

Reif Cohen estimates that AOL advertising sales will increase by 13 percent next year, in part because of growth in sponsored search. She added that AOL's performance looks worse than it is because the unit is still winding down old contracts.

Although AOL may benefit from sponsored search revenues, much of the company's chances for a rebound rest on its ability to build more productive relationships with agencies, AOL's Barrett admits.

"It's obvious we've come a long way in our relations with agencies, but we still have a way to go," said Barrett. "We still aren't the easiest to work with, and we want to change that."