Commentary: Bad news, brighter outlook

Don't be deceived by the bad news coming out of AOL Time Warner lately, Gartner warns. There's a lot of it, but the company still has a strong market position.

2 min read
By Eric Paulak, Gartner Analyst

Don't be deceived by the bad news coming out of AOL Time Warner lately. There's a lot of it, but the company still has a strong market position.

At first sight, AOL Time Warner's

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preliminary statement for the fourth quarter of 2001 and the whole year looks like all bad news. Revenue for the year just ended, reset at $38 billion, will be $2 billion lower than forecast, and for 2002, revenue is now expected to grow only by 5 percent to 8 percent instead of the previously forecast 8 percent to 12 percent. New accounting standards will also force the media giant to take a $40 billion to $60 billion write-down in 2002.

Other bad news is that the company's advertising revenue has declined quarter over quarter. And although executives tried to put a positive spin on the growth in online commerce by its customers--up by 67 percent to $33 billion--most of the spending was not with AOL, which thus did not benefit directly from the increase. Moreover, Time Warner Telecom is struggling along with all the rest of the U.S. competitive local-exchange carriers, and AOL Instant Messenger has problems with security.

The good news is that, although advertising revenue is declining, the company's market share for online advertising is increasing. More than half of all online ads on the Internet are now bought on AOL sites. When the market turns round, AOL will be positioned to dominate the online ad market. At the same time, it continues to enjoy better cross-product advertising sales through its online and publishing outlets. Selling its own products, like the Harry Potter and "Lord of the Rings" movies, has benefited the company enormously.

AOL Time Warner also announced that it will acquire Bertelsmann's 49 percent stake in AOL Europe during 2002. This move will help to increase AOL's profitability. The European operation experienced substantial growth in the last year, with membership of AOL services growing by 40 percent to 5.5 million.

Overall, AOL Time Warner is still the market leader in reaching online consumers, and the outlook for the company remains positive.

(For related commentary on the security hole recently found in AOL Instant Messenger, see Gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.