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AOL Seeks Eyeballs

Jonathan Berr

Time Warner (TWX Quote) already is gaining ground on its rivals as it prepares for a major overhaul of its AOL Internet unit.

The top 10 advertisers at AOL outspent their counterparts at Microsoft's(MSFT Quote) MSN in the first quarter, according to the most recent available data from TNS Media Intelligence. Yahoo! (YHOO Quote), the No. 1 Web site, attracted the most ad dollars, TNS says. None of the companies would comment on the estimates.

Time Warner is hoping that the changes it announced at AOL last week will help it capitalize on this trend. Though advertisers have praised improvements at AOL in areas such as video content, they point out that Time Warner must still persuade marketers to shift money to AOL from Yahoo! and MSN.

"They just can't rest on their laurels," says Jeff Marshall, who oversees Internet ad buying for Starcom MediaVest. "They are going to have to spend a lot more money on marketing. They are going to need to drive audience and eyeballs."

AOL already has turned to Google(GOOG Quote) to help boost its advertising sales. Last year, Google acquired a 5% stake in AOL for $1 billion. Google also wants more branded advertising spending for itself and is encouraging companies that usually rely on portals to use search instead.

Time Warner expects to save $1 billion through next year as it quits marketing AOL's fading dial-up access business to seek more advertising revenue. AOL is also cutting 5,000 jobs. The company has said the overhaul won't have a material impact on its bottom line.

Investors, who have long considered AOL a drag on Time Warner's stock, may not be willing to wait long for a turnaround. The unit continues to be one of the company's laggards, showing an anemic 2% revenue gain in the second quarter. Shares of the parent company of CNN and Warner Bros. have dropped 5% this year.

Though AOL trails Yahoo! and MSN in popularity, it remains one of the best-known Internet brands, even though its audience is much smaller than it was during its heyday.

"They may have an easier time of it because of their legacy, which in many cases may actually be stronger than what their current market position indicates they have," says Marc Goldston, chief executive of United Online(UNTD Quote). The company owns Classmates.com, one of the biggest Internet advertisers.

For AOL to succeed, it will not only have to convince users of rival sites to check it out. The company will also need to get those users to stay for as long as possible so it can assure advertisers that their marketing messages will be seen.

That's not going to be easy, since AOL members with broadband access are no longer tied to the site through monthly fees. However, some AOL features, including the investment information blog Blogging Stocks, are gaining in popularity.

During the first quarter, Nielsen Monitor-Plus estimates that spending on Web ads excluding search rose 46%, more than triple the next-highest category, Spanish language media, which gained 14%, according to an estimate of the latest available data released July 17.

There shouldn't be much of a slowdown in online advertising, even among companies that are looking to cut costs because of worries about the economy. Web advertising would probably be the last to face cuts, since it's so efficient, observers say. Majestic Research estimates that the so-called return on investment, the key metric for advertisers, is roughly five times better on the Web than offline.

"Budgets are coming out of television and print to go into the digital space," says Starcom MediaVest's Marshall. "We continue to see that growing aggressively."

Foster's Beer recently decided to quit advertising on television altogether and focus its spending in the U.S. solely online so it can more effectively reach target demographic of men 21 and over, says Peter Marino, a spokesman for SABMiller, the beer's U.S. distributor.

Earlier this year, Burger King began advertising a promotion for video downloads. More than 86,000 people have signed up to be "friends" of the company's King mascot.

"We are very pleased with the results that we've seen," said Gillian Smith, the chain's senior director of media and interactive, in a recent interview. "It's due to the fact that we are in such a targeted venue and we know our creative content resonates."