AOL's pop-up sacrifice

news analysis America Online's decision to drop paid pop-up advertisements on its service underscores concerns about the strength of its most valuable asset: subscribers.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
news analysis America Online's decision to drop paid pop-up advertisements on its service underscores concerns about the strength of its most valuable asset: subscribers.

The world's largest Internet service provider Tuesday took its most aggressive step yet against the reviled advertising format when AOL CEO Jonathan Miller promised to phase out all pop-ups sold to third-party advertisers.

The proliferation of such ads has been one of the biggest complaints among AOL's 35 million subscribers, and the AOL Time Warner division has progressively cut back on them in a bid to win back fading customer loyalty.

Although they're hated by Web surfers, pop-ups have remained popular among publishers scrambling to attract advertisers disenchanted with banners and other unobtrusive online ad formats. AOL said the move will cost it $30 million in earnings before interest, taxes, depreciation and amortization (EBITDA) for 2003.

But that could be a drop in the ocean compared to the loss of revenue should millions of subscribers log off to sign up with rival services, such as Microsoft's MSN service or EarthLink. Many other defectors are leaving for broadband services, provided by their local telephone and cable companies.

So at a time when AOL's online advertising revenues are plummeting, analysts pointed out that the service needs to hold onto what it's got.

"Pop-up ads have a negligible impact financially, but the benefits of pleasing your member base could prove quite substantial in terms of enhancing customer retention, stimulating new growth and possibly causing members to stay online longer," said Fred Moran, an equity analyst at Jeffries & Co.

While advertising has been a huge disappointment to the division in recent months, Miller said lost pop-up revenue will be made up by sales of new "contextually relevant" advertisements, in which product pitches are more closely folded into content.

This doesn't mean that pop-ups will disappear completely from AOL. The online service will still use pop-ups-?presumably sparingly--for internal offerings and feature changes. Once its ongoing deals with third parties expire, the number of pop-ups will decline significantly.

"This goes to attracting new members and keeping existing members happy," said an AOL spokesman.

Popping the pop-up
Miller's announcement for now suspends the tug-of-war between AOL's financial interests and the happiness of its subscribers. Pop-ups on AOL typically appear when members sign on, forcing them to respond to the ads or close the windows. Members can turn off all pop-ups by changing AOL's marketing preferences, but it's a multi-step process that may be daunting to computer neophytes.

User ire over pop-ups has even sparked legal action. In February, a group of subscribers sued AOL Time Warner, alleging that AOL wrongfully charged their credit cards despite declining the pop-up offering. The users claimed they clicked the "No thanks" button, but still were charged for products.

For the Internet at large, getting rid of pop-ups goes against the tide. Pop-ups and intrusive promotions have proliferated on the Web, and are now commonplace by-products of surfing. While pop-ups were taboo during the boom years, the more difficult financial environment and the online advertising slowdown have prompted some content providers to embrace just about any format that brings revenue. These days, it's no surprise to see animations flashing across a home page such as Yahoo or ESPN.com that force people to close the ad before proceeding.

The number of pop-up ads grew from about 3.9 billion in the first quarter of this year to nearly 5 billion in the second quarter, according to Nielsen/NetRatings, which measures Internet traffic patterns. In response, hundreds of thousands of consumers have downloaded some kind of pop-up advertising filtering technology to block the online interruptions.

Whether or not AOL's move convinces others to follow remains to be seen.

"The real big message is what it means for the Internet generally," said Phil Leigh, an analyst at Raymond James. "The practice of using them has proliferated and it has been increasingly annoying."

You've got work to do
For AOL executives such as Miller, the job won't get easier over the next few months. Miller and AOL's team of executives are trying to work though a restructuring plan to steer AOL back on course. Miller will present AOL's revitalization strategy to AOL Time Warner's board of directors in November. If it's approved, he'll inform Wall Street of his plans in December, according to a company spokesman.

Change at AOL is imperative. The unit this year has witnessed online advertising revenue plummet, which in turn has dragged down the stock price of parent company AOL Time Warner. The downward spiral has caused upheaval in AOL Time Warner's and AOL's top executive ranks while forcing AOL to rethink its overall strategy.

More damaging, however, has been an ongoing investigation by the Securities and Exchange Commission and the Department of Justice over AOL's accounting practices. The investigation overshadowing the company has angered large shareholders and investors, some of whom have started pointing their fingers at AOL Time Warner chairman Steve Case, according to reports.

Inside the AOL tempest, however, executives have been trying to portray a back-to-basics message by highlighting the array of members and communities inhabiting the service. AOL executives publicly have been blunt about losing sight of member satisfaction during the boom years.

"We need to get back to our roots," Ted Leonsis, vice chairman and ten-year veteran of the AOL division, said in an interview Tuesday. "I think we lost our way a bit."

Will subscribers blossom or wilt?
One clear sign of that is subscriber growth. In July, AOL Time Warner reported that AOL added 492,000 subscribers from the previous quarter for a grand total of 35.1 million. In contrast, AOL added 1.3 million new subscribers over the same period last year.

Potential sources of new memberships also seemed to be drying up in areas such as Latin America and Europe. But its core base of U.S. subscribers remained strong. Executives reported 17.7 million U.S. subscribers paying $23.90 a month for AOL, about twice as much as Microsoft's total subscriber base of 9 million.

Competition from Microsoft will also heat up after the software company launches its MSN 8 Internet service on Oct. 24.

The annual software upgrades from AOL and Microsoft make October a hype-filled month. But the real winner for the hearts and minds of Internet users won't be clarified until either service can provide unequivocal evidence of growth.

Perhaps getting rid of pop-ups is enough incentive for some on-the-fence AOL subscribers to at least stay.