AOL gambles on big ad deals
The No. 1 online service has cut many lucrative deals with advertisers and content providers, but analysts question the strategy's viability.
But the question is: how long will this work? Some analysts question the long-term viability of this strategy, while AOL remains confident that it has only begun to tap the market potential.
AOL, when it went to flat-rate pricing in December 1996, started pursuing a strategy of getting money not just from subscriptions but also from advertising and commerce.
On a regular basis, AOL has been announcing deals such as yesterday's in which Intuit agreed to pay $30 million to AOL over three years. The deal calls for Intuit to be the anchor tenant in the Personal Finance and WorkPlace channels on AOL.com, the online service's Web site.
Other recent deals include AOL getting $20 million from Cybermeals over four years; Barnes & Noble paying AOL $40 million to be AOL's exclusive bookseller for four years (Amazon.com, Barnes & Noble's chief competitor on the Net, has a separate deal with AOL.com); and American Greetings cutting an $18 million deal to provide online greeting cards through AOL.
AOL's strategy has been to build itself into a brand--a consumer product name that increasingly attracts advertisers. So far, that plan has worked well.
Companies wanting a mass audience only have a few places to go, and AOL is "the easiest single place to go and make the big distribution deal," said Kate Delhagen, an analyst with Forrester Research.
"They're pushing the limit right now," Delhagen said.
"Some day the bull market is going to be over," he said.
Gregory Wester, an analyst with the Yankee Group, added that the multiyear deals are being cut with the expectation on both ends that AOL will continue to grow.
If AOL does maintain its growth, the partners wind up with a great deal. But AOL in many cases won't be able to pursue other deals based on new membership numbers because it has signed exclusive contracts.
"There's a bit of rolling the dice in all these deals," Wester said. "The financial value is based on a snapshot with a decent amount of betting on tomorrow's traffic. It's kind of like buying a billboard on a highway--what it's worth is based on how it's placed, where the traffic is coming from and going to, and who else is building highways that could circumvent your value."
"If you don't lock up the customer, someone else will lock up the customer--the deal may not be profitable early on, but to exist in the future you need to eliminate your competitors that could lock up those customers," he added.
Internet copy editor Beth Lipton contributed to this report.