AOL's Ads Surge, Subscriptions Drop

America Online’s advertising revenues rose 44 percent to $79 million in the third quarter, driven by search and its acquisition of Advertising.com. Meanwhile, subscriptions revenues declined 3 percent, by $52 million, according to AOL parent Time Warner’s earnings report.

“We are clearly participating more aggressively in the growing online ad market,” said Dick Parsons, chairman and CEO of Time Warner. Parsons credited AOL ad revenues for helping boost growth in ad revenues for the company as a whole.

The company also disclosed it has established a $500 million reserve relating to a continuing investigation by the Securities and Exchange Commission (SEC) into the way AOL accounted for advertising deals. SEC inquiries also pushed Time Warner to say it would restate its accounting for its interests in AOL Europe prior to 2002, when it acquired 80 percent of Bertelsmann’s interest in the division.

Overall AOL revenues rose by $26 million, or 1 percent, to $2.1 billion in the quarter. Operating income rose 74 percent to $261 million, largely due to a reduction in network expenses, a gain from the sale of AOL Japan, and lower depreciation expenses.

Yesterday, AOL acknowledged it was planning to cut 700 jobs in its Dulles, Virginia, headquarters, in an effort to reduce expenses.

AOL’s advertising revenue jump was largely due to the impact of its paid search agreement with Google. Paid search revenue grew 70 percent in the quarter, to $30 million. The Advertising.com acquisition, which closed August 2, brought AOL $35 million in revenues in the quarter.

The company hopes to drive future advertising growth through the transition from AOL’s proprietary Rainman platform to standard HTML. Don Logan, chairman of Time Warner’s media and communications group, said that with that transition, AOL members will be able to access AOL at work, which the company expects will boost usage and attract advertisers. The company recently launched a new HTML-based AOL.com for members.

“We plan to launch an even better AOL.com destination for both members and non-members in the next year,” said Logan.

Subscription losses — a perennial AOL problem in recent years — continued in the quarter. The AOL service lost 646,000 domestic members in the quarter, to end up at 22.7 million domestic members. That’s a loss of 2 million subscribers since the year-ago quarter. In Europe, the company lost 8,000 members over the quarter, to end up at 6.3 million.

Time Warner as a whole reported net income of $499 million, or $0.11 a share, for the quarter. The company brought in $9.9 billion in total revenues in the third quarter.