AOL revenue, subscribers plummet

Analyst calls company an albatross around Time Warner's neck

Third-quarter revenues for AOL LLC declined 38%, or $745 million, from $1.96 billion to $1.2 billion, year over year. Subscription revenues declined by 56%, or $820 million for the same period, according to Time Warner Inc.'s results filed yesterday.

Subscribers fell to 10.1 million, down 5.1 million or 33% during the same period last year, and were down 851,000 from the second quarter of this year, according to the earnings statement (PDF format).

Before the merger with Time Warner in 2001, AOL had more than 30 million subscribers, according to the earnings statement.

Time Warner said the decline in subscription revenue was because of the sales of AOL's Internet access businesses in the U.K., France and Germany (approximately $410 million), as well as a decrease in AOL subscribers in the U.S. Time Warner said that was the result of AOL's previously announced strategy to offer its e-mail, certain software and other products free of charge to U.S. users who have their own Internet connection and focus on its advertising business.

Those declining numbers don't bode well for AOL or Time Warner, according to one analyst.

"AOL is kind of an albatross around Time Warner's neck," said Rob Enderle, an independent analyst and principal of the Enderle Group. "Remember how they came together. It wasn't Time Warner buying AOL, it was AOL buying Time Warner, but Time Warner has reasserted control, reversing the power structure so the goal of merging those two companies was never really reached. And the end result was that AOL became a nonstrategic part of Time Warner."

Enderle said when the Internet went mainstream, AOL became obsolete and the company has been dealing with that issue ever since. However, he said AOL did not deal with the change effectively.

"As a result, we're dealing with a huge problem with regard to a technology change or a market change and AOL itself was not able to change well with it," Enderle said. "At this time, Time Warner does not have the skill set or the interest to really bring AOL around."

For AOL to survive, Time Warner has to spin it off, he said.

"If AOL is going to survive, it's going to have to survive on its own," he said. "The way it is right now is just slow death, and clearly the current arrangement and the current relationship just isn't working."

But Kathy Sharpe, CEO of Sharpe Partners LLC, a New York marketing and consulting firm, disagreed. Sharpe said AOL hasn't had time to absorb some of the strategic acquisitions it has made this year, such as Tacoda Inc., a company that specializes in delivering ads based on users' online activities.

"With those acquisitions, AOL got some very smart people, and they're looking to shift to more of an ad network model and less of a portal, and that would make them more appealing as an ad buy," she said.

Sharpe said she doesn't think Time Warner will sell AOL because it has invested too much in it. She also said Time Warner needs an Internet presence of significance because its other properties are not necessarily doing well, either.

"AOL is a critical part of their arsenal, and they need AOL and they need it to work," Sharpe said. "I think they're going to continue to figure out how they're going to get it to work ... but they can't throw it away and they can't let it dissolve."

However, AOL has to show significant improvement in the next 18 months, she said. "There are a lot of smart people there and they're doing a lot of streamlining so I think they can."

Copyright © 2007 IDG Communications, Inc.

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