AOL Display-Ad Revenue Is Up -- Just Not Enough to Make Up for Other Suckage

Last Updated May 4, 2011 2:39 PM EDT

AOL reported quarterly earnings today, with revenue and profit down, as has been the trend there. The one obvious ray of financial hope was the first year-over-year increase in display advertising. AOL wants to spin this as an important milestone in the company's turnaround.

Some analysts buy the reasoning and the stock is up. However, if you look at the larger picture, the overall results are discouraging. Growth in display ad revenue would have to jump through the roof to compensate for suckage in the rest of the business.

To get a more complete view of AOL revenue lines, I assembled a table, based on data from the company's earnings releases, for the last 10 quarters (click to enlarge):

Display ad revenue was up by just under 4 percent compared with the same quarter in 2010. Higher stock prices show that the markets have cheered the news. Certainly, it's better than yet another year-over-year stick in the eye. However, nothing here suggests a turnaround. Look at the graphical representation of the different revenue lines and totals (click to enlarge):

Not everything is bad. There is also a year of sequential quarter growth of third-party ads. Again, that's good financial news for the company, but not enough to make a difference.

The dial-up business still dying a slow death. Duh
That said, total revenue is still down 17 percent year-over-year for the quarter, or $112.9 million. The subscription business continues to die off as people realize that they don't need to pay AOL for services. The curve is flattening out a bit, so perhaps the company will eventually hit a core of people who actually still use dial-up and haven't passively continued subscriptions for no reason. But that doesn't solve the drop-off of search advertising.

Granted, Armstrong is all hot and bothered over the company's large ad format, in which one campaign takes up all the ad spots on a given page. Click-through rates are nearly double the smaller ads, so AOL claims, and the large ads offer 6.4 times the "engagement" (however the ad sales people define it).

Nevertheless, to make up for the total loss, display ads would have had to grow at an enormous 93.8 percent rate. And the money pumped into Patch, the hyperlocal news service, continues to swell, with another $40 million into a hole that had better soon bottom out. The question becomes what AOL has to do going forward. It has the following realistic choices:

  • rapidly increase the larger ad rollout and hope that advertisers will see enough value past pilot programs to spend more money (and that readers don't get so annoyed with overwhelming ads that they go elsewhere or get numbed to the approach)
  • reduce spending even more (and is Patch really worth all that money?)
  • make a push on third-party ad revenue
The focus is on display ads because, frankly, that's the only other segment even close to the size of dying subscription income. The next two quarters will be telling. If AOL can't get and maintain strong double-digit growth in display ads, then a linear trend on total revenue suggests that it will be down near $300 million in Q1 2012. And that's not enough money to sustain the company, let alone provide extra cash for acquisitions and experiments like Patch.


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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.