Aol faces uphill road as it goes it alone

Aol may have finally gained its independence from Time Warner but it isn't free from its years-long crisis, which it will have to battle long and hard to recover from, with very little room for error in strategy and execution.

Aol has struggled for years trying to shift its business from dial-up Internet access fees to online ad revenue. But while deliberately phasing out its ISP business, Aol has had disappointing performance in online advertising, consistently trailing the industry's revenue growth.

In Time Warner's third quarter, ended Sept. 30, Aol's revenue dropped 23 percent year-on-year to $777 million. The advertising revenue specifically fell 18 percent. By comparison, the global online ad industry had a 1 percent revenue drop, according to IDC.

Since the beginning of 2005, Aol's online ad market share in the U.S. has fallen from 8.2 percent to 4.4 percent in this year's third quarter, according to IDC.

The company is also in the process of shedding a third of its global staff, which can't be helping employee morale or the confidence of advertising clients.

"The brand is severely weakened. It's not very well liked nor trusted," said IDC analyst Karsten Weide.

Although it undoubtedly has established, popular assets in terms of consumer online products and advertising services, Aol lacks a blockbuster property that could super-charge its popularity and revenue.

"They have popular sites and products, and they have traffic, and the ad network with the greatest reach in, but when you look at everything they own, they don't have a single area or property that's a breakout success and has marquee status," said industry analyst Greg Sterling from Sterling Market Intelligence.

Many observers have over the years blamed Time Warner for Aol's woes, saying the parent company didn't give its Internet unit the backing or freedom to chart its own course.

That bad blood had its origins in their blockbuster merger, which renamed the company AOL Time Warner and gave the AOL team equal billing for a while, leading to intense corporate wars inside the company. "Being part of Time Warner never helped Aol much," Weide said.

Yet, with its IPO on Thursday, Aol is finally on its own. Its CEO, former Google star Tim Armstrong, came on board in March and is gung-ho about Aol's opportunities.

"Today marks a rebirth for the company and what the future will be built on," he said at a press conference on Thursday at the New York Stock Exchange, where Aol shares began publicly trading.

However, it's not clear if he has chosen the right strategy, which centers on creating original content and fine-tuning Aol's online advertising and Internet communication services.

"It's very challenging to be Aol and be a portal right now," said Forrester analyst James McQuivey. "Unless Aol can find something unique about its experience or about its customers that they're capable of serving, it'll be hard to see how they'll rally back to any former glory of yesteryear."

Portals like Aol used to be people's home on the Internet, but that role has shifted over to social networking sites like Facebook. Aol's pricey acquisition of social network Bebo -- US$850 million -- in March 2008 didn't have the expected consequences of putting Aol on the social networking map.

Rather, it was Facebook that exploded in popularity. In October 2008, Aol ranked fourth in traffic in the U.S. with 111.2 million unique visitors, while Facebook was fifteenth with 46 million, according to comScore. A year later, Aol, still in fourth place, had dropped to 98.5 million, while Facebook had shot up to fifth place with 97.3 million. Globally, Facebook has 350 million monthly users to AOL's 250 million today.

Likely aware that Aol needs new plans to ignite growth, Armstrong is betting on original content. At the press conference, Armstrong declared that "the next wave of the Internet will really be about content," a bold statement that has some industry observers scratching their heads.

"I don't agree with that," Sterling said. "Content is very important and Aol has some good sites, but there's a lot of content that's commoditized, especially around news. It's a more nuanced issue, more complex."

Still, Aol is jumping feet-first into original content creation. The company now has 3,500 full-time and freelance "content creators," like writers, photographers, videographers and journalists, and 80 percent of content on Aol sites is original.

McQuivey questions the value of creating original content if many other outlets are also providing their own coverage of the same topic or event. "This is why the newspaper and magazine businesses are getting whittled down, because you don't need as many people providing the same story in a digital world," he said.

Nonetheless, Aol obviously sees big opportunities and is beta-testing a content management system called, where contributors will find topics around the clock that the company wants covered and will pay for in order to publish the submitted stories and photos on its sites.

A big piece of the original content strategy will be to provide what Aol calls "hyper local" news, and for that end the company acquired Patch Media Corporation, which offers local town news, and Going, an event city guide.

But McQuivey sees the strategy as misguided. The value isn't in having a centralized content creation operation, but rather in helping end users find, aggregate and share the content that already exists, he said. That's why people flock to Google, Twitter and Facebook.

"If they could make significant advances in personalization or search technology, that could help them. But I don't know that's where they're positioning themselves," McQuivey said.

Sterling shares a similar view and points out that Aol once had aspirations in the search market but seems to have de-emphasized that aspect of its business in recent years.

"There is so much information on the Internet, so much of it to track. Tools that help people discover and manage that information are very useful, so that's where users go," he said.

"Not to say that Aol can't do that, but what Armstrong seems to be saying is that Aol will create lots of destinations for people to come to in a loyal way, like they did with their local newspaper in the past," Sterling said.

Weide points out that creating original content is expensive, particularly on the personnel side.

Armstrong has also stressed the importance of AOL's communication tools, like its popular webmail and IM services, but while those aren't going away, their usage is diminishing among consumers who are communicating via social networks and microblogging services like Twitter.

"Every business wants to grow, but most of Aol's assets aren't high growth assets," McQuivey said.

"Aol runs the risk of becoming one of those sites that you used to go to," he added.

Copyright © 2009 IDG Communications, Inc.

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