Time Warner (NYSE: TWX ) sounds excited about its future, judging by the optimistic comments Time Warner and AOL executives made at recent Wall Street conferences. All the same, I wonder whether the company will have trouble shifting AOL from its traditional subscriber-driven service to a new ad-based business model.
Don't look there! Look over here!
Despite AOL's high hopes, its online advertising revenues have recently trended downward, even after more encouraging data in previous quarters.
Transcripts of AOL's recent investor conferences revealed an interesting (if not surprising) fact: 40% to 45% of AOL's traffic comes from email. Simple email (and instant messaging) became AOL's most essential apps when Web users ditched the service's "training wheels" and grew increasingly savvy about navigating the Web on their own.
At the Merrill Lynch conference, AOL President Ron Grant explained that 25% of traffic comes from AOL's content pages, and the remainder from services like search and MapQuest. There's certainly plenty of room for improvement, but when only a quarter of your traffic is actually coming from your content pages, you've also got serious work to do.
Grant highlighted AOL Money & Finance as one promising area. After AOL relaunched the site, page views went up by 5%, and page views per unique visitor rose 20%. Grant was also optimistic about the addition of TheStreet.com's (Nasdaq: TSCM ) co-founder and showman trader extraordinaire, Jim Cramer, to AOL's BloggingStocks.
Still, investors are right to be concerned about how much AOL can grow its traffic and popularity. Google (Nasdaq: GOOG ) , Yahoo! (Nasdaq: YHOO ) , and Microsoft (Nasdaq: MSFT ) all provide some or all of AOL's services, including free email, instant messaging, stock information hubs, maps, and search. After poking around AOL's content on its portals and email service, I'll admit that the company has done a good job modernizing in the face of entrenched rivals. Still, I suspect that people won't rush to switch from their usual sites to AOL's offerings.
In August, Nielsen/NetRatings ranked AOL Media Network the fifth most popular Web brand by unique visits, behind Google, Yahoo!, Microsoft, and MSN. However, AOL bests them all when it comes to time spent on the site, a definite bright spot.
AOL also discussed its lead in advertising, citing its partnerships with "the biggest and best Web sites," and its success at targeting ads to specific users. Its Advertising.com boasts an 85% reach to online consumers on highly trafficked Web destinations. But if their recent strategies and acquisitions are any guide, Google, Yahoo!, and Microsoft all have similar ideas about advertising, too.
Does a Madison Avenue address truly matter?
AOL's move to New York City certainly says a lot about the company's priorities. To me, hinging high hopes on the move seems, well, a bit lame for a company that once really was on the cutting edge. After all, the ad-makers of Madison Avenue are enduring their own share of disruption, particularly in traditional media.
Edgy agencies far from the Big Apple seem to be doing just as well, and in some cases better, than the old-school ad stalwarts. Take Richmond, Va.-based Martin Agency, which has grabbed a lot of attention with its highly successful Caveman campaign for Berkshire Hathaway's GEICO. It's also been tapped by huge companies like Wal-Mart (NYSE: WMT ) and UPS (NYSE: UPS ) . In addition, traditional print ads and TV spots are now being joined or supplanted by simple word of mouth, online social networks, and other forward-looking ways to draw people's attention.
AOL's current rah-rah attitude toward advertising may also seem overblown to those of us with relatively long memories. Executives touted their expectation that online advertising will exhibit a compound annual growth rate of 20% over the next several years, but if the economy slows down, so will that growth. Even if online ads remain relatively resilient compared to other forms of advertising -- a reasonable proposition, given online ads' strength in measuring success and targeting audiences -- it won't guarantee AOL a bigger chunk of that shrunken market than its formidable Internet rivals.
I hate to beat up on Time Warner and AOL too much. Even the most venerated media companies are facing serious challenges in keeping pace with rapidly evolving customer habits and tastes. Despite Time Warner's current high hopes for advertising, shareholders could face a bumpy road ahead.