The ongoing reccession made the internet giants like AOL and Yahoo to come up with new online strategies to take full advantage of this era of online advertisement. On December 9th Time Warner span off AOL, undoing a famously ill-conceived merger. A couple of days earlier Yahoo! and Microsoft finalised an agreement to merge their web-search and much of their advertising businesses, freeing Yahoo! to hone a new strategy. Peculiarly, both firms’ comeback plans hinge on giving away content to attract traffic and thus advertising—an online strategy that has disappointed many media companies.
AOL and Yahoo! came of age a decade ago in different corners of the internet: one as the biggest provider of dial-up access, the other as the leading web directory. Both soon turned into “portals” providing both content and communications tools, such as web-mail and instant messaging. More recently, both have drifted while the internet evolved around them. A series of weak bosses failed to do away with fiefs, professionalise management and keep the brands fresh, even as competition—from broadband in the case of AOL, and from rivals such as Google and Facebook for Yahoo!—ate into revenues.
Now both firms are trying to get back on their feet under new bosses. But revenues and profits continue to fall, and not just because of the recession. Yahoo! is losing market share in online searches, and advertising with it. Revenues in the first nine months of the year fell by 13% to $4.7 billion and profits by 38% to $445m. In the same period AOL’s advertising sales dropped 19% to $1.28 billion and its profits by 43% to $247m, mainly because its internet-access business continues to shrink. Advertising now generates more revenue than subscriptions, although that too has suffered (see chart).
These numbers will probably improve once the economy picks up. But both firms are also touting new strategies. Tim Armstrong, AOL’s boss, wants the firm to become “the largest producer of quality online content and the largest seller of online display advertising”. At least when it comes to the first part, AOL is making headway. It has already become a digital media giant, running 80 websites covering everything from fashion (stylelist.com) and country music (theboot.com) to local news (patch.com). It has about 3,500 journalists on its payroll, 500 of whom work full-time.
As for the second part of Mr Armstrong’s formula, AOL has just launched a website called seed.com and a new content-management system that will, he says, “fundamentally change how people create content” by predicting what kind of stories and photos will appeal most to readers. If the system detects that consumers are already visiting websites and conducting searches related to Halloween in August, for instance, it will encourage editors to publish articles on the subject.
Carol Bartz, Yahoo!’s boss, has similar plans. She wants both to expand its audience, especially in emerging markets where internet use is still growing rapidly, and to package that audience in ways useful to advertisers. Yahoo!’s reach is already enormous: in October, its sites had 158m unique visitors in America, compared with 98m for AOL, according to comScore, a market-research firm. Yahoo! Mail boasts 106m monthly users worldwide, AOL’s e-mail service only 36m. Better yet, Yahoo! runs the web’s most popular finance, sports and news websites. They are also cheap to run, since they are aggregators for the most part, republishing other websites’ content rather than producing their own.
Mr Armstrong, however, argues that advertisers are becoming more discerning about where they place their ads, and will pay a premium to appear on trusted websites next to reputable content. This, he believes, will favour AOL, with its bouquet of niche websites and home-made content.
Online display advertising, meaning the banners and boxes that appear on many websites, has held up well in the recession, remaining at $3.8 billion in the first half of the year in America, according to the Interactive Advertising Bureau. But the money is spread across an ever-growing inventory of web pages. Old-media firms have lost faith in the notion that online advertising will ever be lucrative enough to cover their costs and now clearly believe that the future lies in subscriptions. AOL will need very loyal readers and clever algorithms to succeed.
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