April 7 (Bloomberg) -- AOL's move to New York this month may signal the last chance for Time Warner Inc.'s Internet division to convince investors it has a future in advertising.
``It's important that they drive improvement in this business fast,'' said Jordan Posner of Matrix Asset Advisors in New York, which owns about 3 million Time Warner shares among $1.6 billion in assets. ``Otherwise they'll wind up with a wasting asset.''
The latest shift away from dial-up Internet subscriptions follows a series of failures since AOL bought Time Warner Inc. in 2001, and almost $1 billion in online ad acquisitions in the past 18 months. AOL Web sites lag behind Yahoo! Inc., Google Inc. and Microsoft Corp. in U.S. visitors, and blogs buzz regularly with rumors of job cuts.
Fourth-quarter ad sales rose 10 percent to $620 million at AOL, while industrywide sales jumped twice as much, according to the Interactive Advertising Bureau. Moving to new offices in Manhattan's Astor Place from Dulles, Virginia, is a bet by Time Warner Chief Executive Officer Jeffrey Bewkes that a change of scenery may revive AOL and appeal to Madison Avenue ad agencies.
``AOL is a drain on management,'' said Michael Morris, an analyst with UBS AG in New York. ``I don't think the direction that they're going with AOL right now is ultimately going to drive growth above the average.''
Ad sales at AOL will probably rise 7 percent this year, versus 20 percent for U.S. online advertising generally, said Morris, who recommends buying Time Warner, the world's largest media company, on the strength of its film and TV studios.
Advertising.com
``I know we have work to do,'' Ron Grant, AOL's chief operating officer, said in an interview last week. ``This is a turnaround. We're really well-positioned to capitalize on a great market in advertising.''
Advertising.com, acquired in 2004 for $435 million, is crucial to that growth. The online network, which buys and sells ads for Web sites, generated 29 percent of AOL's $2.23 billion in ad sales last year. In February, it helped AOL's ad business touch 90 percent of the 185 million Internet users in the U.S., according to Reston, Virginia-based researcher ComScore Inc.
As if to underscore the point, advertising.com last month hosted members of the media, clients and employees at a party at the Top of the Rock on the 67th floor of Rockefeller Center. Waiters in white jackets and black bowties ferried champagne cocktails along with crab cakes from Cipriani.
Whether advertising.com can revive AOL's fortunes depends on Lynda Clarizio, who was its president until last month. She now has the expanded role of integrating recent acquisitions such as the ad-technology companies Quigo and Tacoda as head of AOL's Platform A advertising business.
Moving Quickly
``We are going to move as quickly as possible,'' Clarizio said in an interview after her promotion. ``Platform A has the best assets possible. The biggest challenge is to be able to move ahead with integration and alignment.''
In recent weeks, Clarizio started reorganizing sales and research teams at Platform A. Her efforts build on AOL's moves to redesign and re-release new versions of Web sites with the hope of attracting more users and, subsequently, more ads.
Success may lead to AOL's sale. Bewkes, an advocate of the ad-sales push, has said he's open to merging AOL with a rival. He's also splitting off AOL's dial-up unit. AOL has held talks with Yahoo, which is fighting Microsoft's $44.6 billion takeover bid, a person familiar with the discussions said in March.
Morris at UBS says Time Warner would be better off without AOL. He values the unit at $12.9 billion, including $3.9 billion for its dial-up unit, or almost a quarter of New York-based Time Warner's market value of $52 billion.
Shrinking Dial-Up
After America Online bought Time Warner for $124 billion, plans to sell TV shows and magazines online never gelled, and the company took $100 billion in writedowns a year later.
At the end of 2007, AOL had 9.3 million Internet-access subscribers, down 50 percent from two years earlier. Efforts to replace those sales with ad dollars by offering Internet users free e-mail and Web security have faltered so far, with revenue declining 33 percent last year.
In March, AOL agreed to buy Bebo, the third-largest U.S. social networking Web site behind MySpace and Facebook, for $850 million.
Time Warner's stock reflects the skepticism of Morris and the urgency voiced by Posner. The shares fell 24 percent last year, the second-biggest drop among the largest U.S. media companies after Comcast Corp. They fell 4 cents to $14.56 at 9:43 a.m. in New York Stock Exchange composite trading.
If the ad strategy fails, investors may revolt. Two years ago, billionaire investor Carl Icahn tried to break up Time Warner. He failed after the company agreed to increase a share buyback and add independent directors to the board.
``I don't know when the board of directors or investors become more active pushing for structural change,'' Morris said. ``We went through that when Icahn was involved. I don't know if anyone wants to try to do that again.''
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