AOL Suffers Ad Dollar, Subscriber Declines

NEW YORK Time Warner reported yesterday that third-quarter ad revenue for its struggling America Online division dropped 33 percent compared to the year-earlier period.

The New York-based media giant attributed the falloff to the reduction of benefits of prior-period contract sales of about $96 million, as well as lower inter-company revenues of $36 million.

Overall Q3 revenue for the Internet unit was $2.1 billion, flat with last quarter and down 5 percent from $2.2 billion in the year-ago quarter. Operating income declined 7 percent to $150 million from $161 million during the same time a year ago.

The AOL results were released as a part of AOL Time Warner’s third-quarter earnings report. The company as a whole recorded Q3 revenue of $10.3 billion, a 4 percent rise over $10 billion in the year-ago period. Q3 net income totaled $541 million, or 12 cents a share, compared with $57 million, or a penny a share, a year-earlier.

Time Warner also reported that AOL’s domestic membership continued to decline. AOL had 24.7 million domestic members as of Sept. 30, a decrease of 2 million from the same quarter last year and 688,000 from the end of Q2.

Over the past year, the Dulles, Va.-based division has lost ground as narrowband subscribers have migrated to competitors’ high-speed Internet services. Still, subscriptions revenue grew 4 percent, due primarily to strong gains at AOL Europe. The overseas online service benefited from favorable foreign currency exchange rates, higher prices and year-over-year membership growth. AOL claimed 6.3 million European subscribers at the end of the third quarter, up 113,000 from Q3 2002 and 23,000 from the second quarter.

The rise in subscriptions revenues, however, was more than offset by declines in advertising and other revenues. Other revenues dropped 63 percent, due mainly to AOL’s previously announced strategy to reduce the promotion of its merchandise business.

The Securities and Exchange Commission continues to investigate a range of transactions principally involving the America Online unit, including advertising arrangements and the methods used to report subscriber numbers. The SEC has determined that the accounting of two related transactions between America Online and Bertelsmann A.G. was not correct. Time Warner said that it continues to believe that the accounting for those transactions was appropriate. However, the company said that it might learn additional information as a result of its own review, discussions with the SEC and/or the SEC’s ongoing investigation that would then lead it to reconsider its views.

Shares in AOL Time Warner (AOL) closed on the New York Stock Exchange today at $14.85, down 21 cents or 1.4 percent. The stock’s 52-week high is $17.89 and 52-week low is $9.90.