AOL's Business Model and Growth Strategies

AOL's Business Model and Growth Strategies

AOL

AOL rose to prominence in the 1990s by providing services such as email that consumers could access by becoming paid subscribers to its internet service. Its online software suite allowed customers to access the world's largest "walled garden" online community and eventually reach out to the internet as a whole. In 2001, at the height of its popularity, AOL bought Time Warner for $164bn. The goal was to create a first-of-its-kind offline and online powerhouse. However, cultural clashes and AOL's financial troubles resulted in Time Warner announcing that it would spin off AOL into a separate public company in 2009, ending the eight-year relationship between the two companies.

AOL’s business model

AOL markets its offerings to advertisers on both AOL properties and its third-party network under the brand AOL Advertising.

• AOL properties – The company generates advertising revenues from AOL Properties through the sale of display, search, and contextual advertising. Except in a few cases, Google is the exclusive web search provider for AOL. Google shares a portion of its revenues with the company. Pricing can involve CPM-based, time-based, or performance-based contracts (in the latter, performance is measured in terms of “click-throughs”). In 2009, advertising revenues associated with the Google relationship were $557m.
• Third-party network – The company’s advertising offerings on the third-party network, where it has historically incurred higher traffic acquisition costs compared to advertising on its own properties, consist primarily of display ads. The company markets its offerings to advertisers under the brand Advertising.com. A significant portion of its revenues on the third-party network is generated from the advertising inventory acquired from a limited number of publishers. Pricing over the third-party network is either CPM-based or performance-based.

From Q4 2010, the company began to de-emphasize the search engine campaign and third-party network in order to strengthen its display ad business.

AOL’s advertising revenues

AOL’s total revenues were $3,257m in 2009, a y-o-y decline of 21.8%, while its ad revenues fell by 16.6% to $1,748m, largely due to a drop in demand for its display advertising business. On the other hand, its search and contextual ad revenues increased, driven by higher revenues per search query on certain AOL properties. The main ad-supported content business, however, is running at a substantial loss, reflecting declining demand for its content-driven websites.

Table 11: AOL advertising revenues ($m), 2007–09
	2007	2008	2009
Total revenues	5,181	4,166	3,257
Ad revenues	2,231	2,096	1,748
Ad revenues (% of total)	43.1%	50.3%	53.7%
Fiscal year end December, 2009

Source: Company information

AOL's strategies

Both AOL and Yahoo came of age in the year 2000, but in different spaces of the internet. They have similar back-stories, and are now converging into the same area: content. Initially, while AOL emerged as the biggest provider of dial-up access, Yahoo became the leading web directory. However, both eventually turned into "portals" providing both content and communications tools, such as webmail and instant messaging. More recently, both have lost touch with the market. Weak and unprofessional top management, lack of vision, and aggressive competition in the form of broadband in the case of AOL, and aggressive rivals such as Google and Facebook in the case of Yahoo, led to declining market shares.

Currently, both firms are trying to get back on their feet under new and enthusiastic leadership. However, revenues and profits continue to fall for both companies. In the case of AOL, its advertising sales dropped mainly because its internet access business is shrinking. Advertising now generates more revenue than subscriptions, although that too is on a decline (see Figure 17).

AOL failed to retain subscribers to its dial-up internet access as broadband services increased. It also failed to successfully market its own broadband service. To overcome this challenge, AOL is attempting to transform itself from a subscription-based service into a website featuring original content services and thereby win online advertising business.

While AOL is profitable, the revenue comes from its dial-up internet access subscription business, which is on a decline, as well as the lucrative outsourcing of search advertising.

M&A deals power the transformation into online advertiser

AOL has acquired popular technology blog TechCrunch to complement its purchases of Engadget, DownloadSquad – the unofficial Apple blog – and other blogs. AOL has also acquired video startup 5min Media, a video syndication network with a library of videos from more than 1,000 media companies and small video producers.

The 5min Media acquisition will complement video creation platform StudioNow, which AOL acquired earlier in 2010 for $36.5m. AOL has merged StudioNow technology into Seed.com, expanding the website's current offerings of professional articles and pictures.

Through these deals, the company is trying to transform itself into an online advertising company that can compete with Google, Yahoo, Microsoft, Facebook, Twitter, and so on. To reinforce its media properties, the company is hiring hundreds of writers to generate content on various topics. The AOL Technology Network currently ranks among the top five websites on tech news and leads the top five in average time spent and average visits per user, according to comScore.

The company has emerged into a digital media giant, running 80 websites ranging from fashion (stylelist.com) and country music (theboot.com) to local news (patch.com). However, many of the acquired content sites play down the branding of their 25-year-old parent.

To boost its online ad revenues, AOL launched seed.com and a new content-management system that will predict what kind of stories and photos will appeal most to readers. If the system detects that consumers are already visiting websites and conducting searches related to Thanksgiving in the first two weeks of November, for instance, it will encourage editors to publish articles on the subject. The company believes that this will assist advertisers in ad placement and thereby help them to reach their target audience. AOL also has a five-year search partnership agreement with Google that helps it to earn ad revenues on AOL properties.

However, in the content space AOL is at a relative competitive disadvantage compared to rivals such as Yahoo, The New York Times, and News Corporation, which have better content to offer, and this could ultimately impact its online ad revenues.

Painful restructuring efforts are aimed at attracting ad dollars

AOL cut $139m in costs during Q1 2010, reduced its workforce by 2,000 employees, and restructured its sales team. It is exiting a number of unprofitable international markets and product offerings; for example, it has closed down its offices in Germany and France. As part of these efforts, the company sold the ICQ instant messaging service for $186m and the marketing firm Perfiliate for approximately $17m.

Traffic to AOL sites dipped during 2009, despite the adoption of a new system late in the year to produce news articles, entertainment, and other online content. AOL attracted 93 million unique US visitors in March 2010, down 12.3% from the previous year, according to comScore.