America Online (AOL) yesterday announced a $435-million deal to acquire online marketing firm Advertising.com, a resounding vote of confidence in the internet advertising market that many had until recently written off for good.
The acquisition is the first significant one made by AOL since the ill-fated takeover of Time Warner in 2000.
Advertising.com buys advertising space from websites and search engines and packages it up for clients wanting to reach certain demographics. The company then sells to advertisers on a performance basis, which means they pay only according to the volume of responses or leads.
The online advertising market collapsed after the peak of the dotcom frenzy in 2000, leading many to question whether the advertising-based model was viable.
The market has been showing signs of life as marketing managers begin to redirect cash towards online advertising. Media buyer Universal McCann recently forecast that internet advertising would grow by 20% this year to $6,8-billion in the US, making it the fastest growing medium.
”Online advertising is back,” said AOL chief executive Jonathan Miller. ”Over the past two years we have seen a rebirth of online advertising. Major advertisers are coming more and more to the web and spending more and more of their marketing money online.”
In the first quarter of this year, AOL recorded advertising revenues of $214-million. The figure was down 5% on the same quarter a year earlier, but AOL has now recorded two successive quarters of back-to-back growth. In the fourth quarter of 2003, it had revenues of $204-million. The performance is still far from the peak of 2000 when AOL was posting advertising sales of $700-million a quarter.
The company is working through some of the deals signed by big name advertisers during the boom. It needs to sell a couple of hundred million dollars of advertising this year just to replace long-term contracts coming to an end.
Miller said the acquisition of a performance-based business added a third revenue stream to AOL’s advertising operation. It already has revenues from conventional brand advertising and the rapidly growing area of search related advertising through a deal with Google, which provides search facilities to AOL.
Advertising.com, founded six years ago, made an operating profit of $12-million last year on revenues of $132-million, an increase of 80%. It had filed for an initial public offering and was to list in New York later this year.
AOL will offer clients Advertising.com as part of an expanded package of services. The company said response-based advertising was the ”holy grail” for clients. AOL will also import some of the media planning and response measuring technology developed by Advertising.com.
Advertising.com said it would still be run as a stand-alone business from its headquarters in Baltimore, working with its own third-party clients.
AOL is struggling to rebuild its business in the face of the downturn in advertising and falling subscriber numbers as internet users desert dial-up for broadband connections.
During the first quarter, the AOL service lost 237 000 users in the US, leaving it with 24-million subscribers. AOL in Europe has another 6,4-million.
It has a broadband service that piggybacks on the cable or telephone company connections and has 3,5-million customers spending $14,95-million for access to
an AOL portal.
AOL remains under investigation for the accounting for advertising sales ahead of the Time Warner merger. – Guardian Unlimited Â