AOL Predicting Weak Ad Sales Through End of Year

AOL Time Warner is predicting weak advertising sales for the rest of the year in both its online service and cable TV divisions. As a result, the company said in a regulatory filing Wednesday, operating revenue will also slow.

According to its quarterly Securities and Exchange Commission (SEC) report, AOL Time Warner said the predicted ad slump derives from lower benefits from previous ad contracts at its Dulles, Va.-based AOL operation and decisions by advertisers to decrease television spending at Time Warner Cable.

The report also said the company is continuing to cooperate with various federal probes into AOL Time Warner’s accounting and subscriber practices.

In March, the company said it may have to restate up to $400 million in revenues as the result of an ongoing SEC probe over how its AOL unit accounted for advertising deals. The disclosure would mark the second time in less than a year that the media giant has had to restate its revenues related to advertising accounting in the AOL division, many of them related to barter deals, which were prevalent during the late 1990s dot-com boom.

In October of 2002, AOL Time Warner said it would restate financial results for eight prior quarters, resulting in a reduction of $190 million in revenues and $97 million less in cash earnings, also related to how the AOL unit accounted for revenues during the end of the dot-com heyday.

Just last month, it was reported AOL might have used a bulk sales initiative with retail partners to inflate its subscriber figures. AOL’s higher-than-expected subscriber loss in the second quarter resulted from the end of a bulk sales agreement with three retailers to sell limited-use accounts for $1 to $3. The deal allowed Target, Sears & Roebuck, and J.C. Penney to offer the discounted accounts to their employees for $10 and keep the extra money.

AOL has lost 1.2 million subscribers in the past year, with most fleeing for high-speed connections or cut-rate dialup plans offered by competitors like NetZero.

Even with the subscriber losses, AOL maintains a huge audience of 25.3 million subscribers. Deutsche Bank forecasts AOL will end the year with 24.5 million subscribers. Maintaining a high audience is key for the online unit’s efforts to turn around its advertising business. In the second quarter, AOL’s ad revenues fell 48 percent to $179 million.

A shrinking subscriber base could also make it harder for AOL to tap into the lucrative paid search business. Cohen forecasts that search will account for 33 percent of AOL’s ad revenues by 2007.