America Online Sees Weak Ad Outlook

AOL Time Warner Inc. (AOL) on Tuesday gave a grim advertising outlook for its America Online Internet business and said it will focus on high-speed services to try to turn the unit around.

Shares of the company, which also owns magazines, cable programming channels and a movie studio, dropped nearly 12 percent, as America Online forecast flat revenue for 2003, signaling it does not expect the turnaround to take hold until 2004 at the earliest.

"It is clear that 2003 will be a transition year, but with this plan we expect America Online to deliver solid growth beginning in 2004," AOL Time Warner Chief Financial Officer Wayne Pace said in a statement.

Slack advertising sales next year will offset any gains in subscriber income, executives said at a meeting with analysts and the media on Tuesday. Cash flow for the unit would be down between 15 percent and 25 percent.

Ad sales started sagging shortly after AOL's deal to buy Time Warner closed in early 2001. The two companies had touted the merger a way to exploit the possibilities of Internet delivery of movies and news, but so far little of that promise has panned out.

High-Speed Push

The unit will start aggressively pushing its high-speed service, which allows for quick video and music downloads over the Web. It is also considering a model similar to cable television, in which AOL will offer a basic level of service to subscribers and premium features for an additional fee.

Analysts and investors have sharply criticized America Online for failing to articulate a strategy to move its dial-up subscribers to the high-speed service, which is essential to delivering its original promise of delivering entertainment over the Internet.

AOL has lost ground to cable companies, which have launched Internet services of their own through their high-speed cable lines.

America Online Chief Executive Jon Miller expects high-speed, or broadband, to be an area of focus. "We missed first wave of broadband because we were too timid in pushing our product," he said at a meeting to announce its strategy for the unit.  

He said he expects the company to push its "bring-your-own access" service, in which subscribers pay AOL for its features but get their high-speed access from another source, such as cable companies.

America Online said advertising and commerce revenue will decline by 40 percent to 50 percent in 2003 because of lower revenue recognition from prior-period commitments.

Consequently, revenue for the Internet division, which is facing a government probe of its accounting practices, will be flat in 2003, with earnings before interest, taxes, depreciation and amortization, or EBITDA, down 15 percent to 25 percent.

For the company as a whole, AOL Time Warner said it expects 2002 EBITDA growth to be at the low end of its previous estimates of 5 percent to 9 percent. Revenue should rise 5 percent to 8 percent, it said.

Exclusive Features From Magazines, CNN

America Online also said it will start offering exclusive features from its magazines and CNN news channel in an effort lure subscribers.

The unit plans to offer some news and features from its parent's magazine stable, including Time, People and Sports Illustrated, exclusively to subscribers at no extra charge.

Such features will no longer be available for free outside of AOL's service, although the magazines could offer the features to non-AOL Internet users for a fee.

AOL subscribers will also have free access to CNN's video service, which is currently available to all Internet users for $4.95 a month. CNN, AOL Time Warner's 24-hour cable news channel, will also work with America Online to develop exclusive features for subscribers.

America Online has already been offering exclusive access to music and videos before their official release. Similarly the service has already been offering access to trailers and photographs from forthcoming films and DVDs.

AOL Time Warner's HBO cable channel and other television channels are also expected to start offering exclusive features through America Online.

AOL Time Warner shares were down $1.97, or 11.9 percent, at $14.60, making them among the worst percentage losers in heavy New York Stock Exchange trade. The stock has fallen more than 50 percent this year.