WorldCom Out of AOL-TW Ad Deal

Bankrupt telecommunications company WorldCom is off the hook for about $182.3 worth of advertising with AOL Time Warner after a bankruptcy court ruled in the telco’s favor Tuesday.

The advertising agreement, signed in June 2001, had WorldCom paying a total of $185 million to AOL for advertising placements through the fourth quarter of 2004.

In exchange for the payments, which amounted to about $20.25 million per quarter, AOL Time Warner agreed to promote WorldCom’s MCI unit on its online and offline properties.

But on Tuesday a bankruptcy judge in New York ruled that WorldCom, which filed for bankruptcy in July listing debts of $41 billion, could cancel the remainder of the agreement. WorldCom had filed a motion in September looking to cancel the AOL ad deal as part of its Chapter 11 bankruptcy reorganization, the largest corporate bankruptcy in U.S. history.

“The agreement is now a cash drain on the Debtors’ estates and should, in the debtor’s business judgment, be rejected,” WorldCom said in its motion to withdraw from the deal.

By rejecting the agreement through bankruptcy court, Worldcom is looking to save about $81 million per year, or about $182.3 million for the remainder of the contract. It has also filed a number of motions seeking to cancel advertising and marketing agreements in the aftermath of its bankruptcy filing.

At the time of the deal, AOL planned to advertise WorldCom products through its franchise of Time Inc. magazines, on its Time Warner Cable network, and on America Online-owned brands such as MapQuest, Digital City, ICQ, and Spinner.

AOL Time Warner had only objected on limited grounds over the date which the contract would end. By ruling that the contract was good up until today, the day of the ruling, the judge essentially ruled in favor of AOL Time Warner’s limited objection to ending the contract.

But overall the ruling is another blow for AOL Time Warner, whose AOL division is looking to recover from a brutal advertising recession that has contributed to a 42 percent drop in ad revenues from 2001.

In addition, both companies are under federal investigation over accounting practices. WorldCom, of course, filed for the largest bankruptcy in history after revealing that $3.85 billion in expenses had been improperly booked. A month later, the company said it uncovered another $3.8 billion in accounting errors.

AOL has also disclosed in Securities and Exchange Commission filings that it might have improperly accounted for as much as $49 million in advertising and commerce revenue booked by America Online.

The problems, which AOL said it uncovered as it was preparing to have its executives certify its past results, involved three separate marketing deals over six quarters, starting in March, 2000.

At least one of those deals is believed to involve WorldCom’s UUNET subsidiary, to which America Online sold advertising, and from which it purchased dialup capabilities and bandwidth.

Christopher Saunders contributed to this report