How AOL is outpacing rivals

With the strategic direction of many companies, online and brick-and-mortar, hinging on results at the newly forged AOL Time Warner, all eyes had been focused on the company's results. But AOL Time Warner shrugged off the ad slowdown that has plagued most of its competitors, comfortably meeting expectations as it captured more share of the online advertising market.

Coupled with disappointments--or the more cautious tone adopted by AOL's online and offline competitors--the results close the chapter, at least for now, on whether online and traditional companies should merge or remain independent.

AOL generated nearly five times as much online advertising revenue as Yahoo in the last quarter, up from a 2.5x multiple in the year-ago period. While other traditional companies continue to struggle with their online initiatives, in contrast, the AOL Interactive service seems to be the engine behind the AOL Time Warner media machine.

With only one calendar quarter as a merged entity under its belt--and many cross-platform initiatives just getting under way--the company's future is encouraging. AOL, which is now the top source of new subscribers to Time Inc. magazines, has also proven its ability to drive music and box office sales. In addition, early tests have demonstrated AOL's success stimulating interest in high-margin digital and high-speed Internet cable services.

In a difficult economy, the company's success can be attributed to three key factors: AOL's billing relationship with subscribers, the potential cross-platform ad opportunities, and the Time Warner sales connection with the Fortune 500.

AOL's billing relationship with its 29 million subscribers provides great knowledge about its customers. That translates into crisper direct marketing and the higher conversion rates that please online advertisers. In addition, Time Warner's existing sales relationships with Fortune 500 companies and ad agencies better positions the company's online division as it squares off against other online rivals.

Both clients and ad agencies are increasingly interested in these sorts of integrated ad buys and cross-promotional opportunities. And that's where AOL can tout its ability to reach clients' desired audience through the company's ownership of leading brands in broadcast, cable, print and online.

The continued success of AOL Time Warner will likely put pressure on other media companies. If AOL is the engine fueling better-than-average growth at the Time Warner businesses, how might other traditional media companies replicate that growth?

There has been speculation that media companies may look to buy Yahoo, which has a 66.4 percent market reach vs. AOL's 78.3 percent reach. Although there is some basis for the speculation, the absence of a credit card relationship between Yahoo and its users could greatly limit its potential to serve as a cross-promotional platform.

Meanwhile, the management team at AOL Time Warner has so far made good strides instilling confidence in the business model. Challenges remain, however.

AOL needs to continue to be a source of new growth for Time Warner's businesses. At the same time, it must avoid bombarding subscribers with advertisements. Similarly, it would be a mistake for content and promotion to be limited to Time Warner music artists and films. And then there is the advertising market, which remains weak--even though growth targets for the year and beyond remain aggressive.

Despite these challenges, it appears as if AOL Time Warner is well-positioned to distance itself from competitors and take advantage of opportunities presented by the convergence of online and traditional media.