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AOL to sell Xdrive, close photo and mobile sites

Program cuts will shut down several storage-focused online services as well as the Time Warner subsidiary's MyMobile effort. Who might want to buy AOL?

AOL is scrapping some online destinations but will push others harder in an attempt to improve its finances, according to internal memos.

Among those products to be shuttered are Bluestring, a site to share videos, music, and photos; Xdrive, a general-purpose online storage service; and AOL Pictures, where people could store and share photos, according to a July 14 memo from Kevin Conroy, AOL's executive vice president of products and marketing. The memo was published Thursday by TechCrunch.

Kevin Conroy
Kevin Conroy AOL

"These consumer storage products haven't gained sufficient traction in the marketplace or the monetization levels necessary to offset the high cost of their operation," Conroy said in the memo. Also to be closed is MyMobile which repackages various AOL services for use on mobile devices.

AOL is likewise paring back some of the blogs it hosts, according to a different memo obtained by The DIYLife blog is being shut down, according to that report, and bloggers there and at the Unofficial Apple Weblog and DownloadSquad, who are paid by the post, have been told to stop posting until July 31 to cut costs.

It's not unusual for companies to cut products to improve finances, but AOL has a particular incentive: corporate owner Time Warner is trying to prepare the once-powerful subsidiary for sale or other strategic alternatives.

AOL will push several other products harder in an attempt to boost revenue. Those products include AOL's browser toolbar, its desktop software, its e-mail service, and its Truveo video search site, according to the July 14 memo.

Update 8:41 a.m. PDT: A source within AOL has confirmed the authenticity of the memos and a plan Conroy mentioned to sell the Xdrive division.

The source characterized the cuts as part of AOL's standard procedures to maintain profitability. Last year, the company cut 50 online properties, including its video download service. As with that change, AOL will provide users options such as partnerships with competitors or archival CDs and DVDs to preserve their data, the source said.

Packaging for sale
Time Warner is separating AOL's two components, audience and access, the former being its online properties and the latter its dial-up Internet access business. The company is doing so "to increase the accountability and operational focus of each of those businesses, enhance our strategic flexibility," said Time Warner Chief Executive Jeff Bewkes earlier this year.

Splitting off the dial-up business is important. With broadband increasingly ordinary, dial-up is going nowhere but down, and selling access to the Internet is an operation most content and advertising companies would be loath to absorb.

Some of the cuts at AOL are of divisions that are aligned with the old dial-up business. For example, Xdrive is offered as one of the perks of premium subscription plans. And AOL Pictures was an early online photo option for subscribers.

So AOL is trying to transform itself into a modern Internet company, with high-traffic properties and online advertising. The question is who might be up for a deal with AOL?

There are two obvious candidates: Yahoo and Microsoft. Both have significant cash, significant online operations, and significant troubles keeping up with Google's rise to prominence. They would love the extra Web site traffic: each page viewed is an opportunity to sell advertisements, and adding all that extra ad inventory expands the clout of the companies' ad networks during a time of consolidation.

It should be noted that AOL's ad network, Platform-A, delivers advertisements to a larger fraction of U.S. Internet users than any of its competitors, according to ComScore's latest statistics. Its reach of 90 percent is ahead of Yahoo, at 83 percent, and Google, at 81 percent.

Online ad growth
Here's why, even with the current economic troubles, AOL is potentially desirable, despite its troubles: U.S. spending on online ads will increase from $25.9 billion this year to $41 billion in 2011, analysis firm eMarketer projects.

But AOL specializes in display ads, the graphical variety that cost advertisers when they're put on Web pages. Google minted its billions of dollars in revenue chiefly on textual search ads, which are paid only when users click on them, a structure that makes it easier for advertisers to measure performance and justify the expense of ad campaigns.

With the economy gone sour, it's these display ads that are under more pressure.

Cowen analysts Jim Friedland and Kevin Kopelman on Friday lowered their forecast for display ad spending in the United States, saying that search ad spending is stronger. "We believe paid search spending is much less exposed to ad budget cuts than other media, based on our previously published analysis of the historical spending patterns on direct mail during recessions," the analysts said.

And display is a smaller part of online ad spending: eMarketer projects that U.S. display ad revenue will increase from $5.5 billion in 2008 to $7.9 billion in 2011, while search ads will increase from $10.4 billion to $16 billion.

For search ads, AOL relies on Google's technology and shares the resulting revenue. Yahoo and Microsoft, though, could swap out the Google ads with their own, adding significant heft to their search ad operations.

Other buyers?
Who else might be interested? Google is showing more signs of interest in diversifying to traditional Internet portal activities such as e-mail, news, finance, and shopping, but it also appears to have the patience to build its own properties using its staggering cash flow. It's got its troubles, but it completely lacks the odor of urgency that emanates from Yahoo and Microsoft.

Another possibility is IAC/InterActiveCorp, a conglomerate of many online properties. However, while IAC wants to expand its advertising network, it also looks not to be in the mood for consolidation. It's seeking to spin off operations such as LendingTree, Ticketmaster, and HSN.

Probably more likely would be a more traditional media company such as The New York Times Co. or News Corp., both of which have shown interest in hitching their carts to the online bandwagon.

The New York Times' advertising revenue decreased 17.8 percent in its most recent quarter, the company said Wednesday, "because of weakness in print advertising," so online advertising could help even if it's not a miracle cure. The Times also announced a partnership with online contacts management site LinkedIn and runs the site.

News Corp., meanwhile, operates MySpace and has an investment in online video site Hulu and has a strong interest in online advertising.