In a bad market for advertising,

AOL Time Warner

(AOL)

is becoming its own best customer.

The media and entertainment conglomerate, which has made no secret of its strategy to advertise on its own properties absent demand from other customers, disclosed figures Wednesday indicating that its in-house advertising continues to grow, both on an absolute dollar basis and relative to third-party ad sales.

Although in-house sales are excluded from AOL Time Warner's total reported revenue, the intersegment numbers -- included in the quarterly financials filed with the

Securities and Exchange Commission

on Wednesday -- suggest the quarterly sales figures for certain AOL Time Warner businesses may be slightly softer than they appear at first glance.

Additionally, the sequential increase in "intercompany" advertising, to use AOL Time Warner's terminology, makes it plausible that people who feel they've seen plenty of America Online service advertisements on TV should prepare themselves for additional repetitions.

AOL shares were off 35 cents in midday trading Thursday to $37.90.

You've Got Ads!

In the third quarter ended Sept. 30, AOL Time Warner reported $97 million in intercompany ad revenue, up from a $1 million pro forma figure for the third quarter of 2000, before America Online and Time Warner merged to create the new company. Figures for the latest period equal 5% of the company's $1.9 billion reported advertising and commerce revenue for the quarter; the intercompany sales aren't included in that companywide figure, a spokeswoman says.

Compare those numbers to the first quarter of 2001, for which AOL Time Warner reported a $71 million figure in intercompany sales -- 3.5% of the company's $2.1 billion in third-party advertising and commerce revenue.

The company's filing on Wednesday specifies two of the company's business segments -- AOL and Networks -- that were particularly helped by intercompany sales in the third quarter. In AOL Time Warner's Oct. 17 financial results press release, the company acknowledged the role that intercompany sales played in the online service's $624 million in advertising and commerce revenue, up 5% year over year.

But prior to Wednesday, the company didn't mention the intercompany transactions' positive effect on the Turner cable networks and the WB television network -- not even when then-chief financial officer Mike Kelly told analysts Oct. 17 that the WB's third-quarter revenue had, contrary to the prevailing trend all over, actually risen from the prior year. (The WB benefited as well from higher ad rates and higher ratings in key demographics.) Overall, the networks segment reported that advertising and commerce revenue for the quarter fell 6% to $535 million, a figure that the AOL Time Warner spokeswoman confirms includes intercompany sales.

David A. Goliath

The exact effect of intercompany sales on different segments' revenue lines is hard to pin down, but they likely aren't huge. And with AOL Time Warner's earnings before interest, taxes, depreciation and amortization -- a bottom-line yardstick commonly used to measure media companies' performance -- growing faster than its revenue, the company's management is proud of all the business it can throw in-house rather than to other companies.

But as

Enron

(ENE)

has proved in an alarming and extreme case, related-party transactions can sometimes cloud the bigger picture. Though AOL Time Warner is no Enron, it never hurts to separate out a company's business with itself.