AOL Forecast to Have Rough 2010

AOL’s turnaround may be at least a year away.

A few days after issuing an optimistic forecast for the online display ad market in 2010, J.P. Morgan analyst Imran Khan predicted a rough year for one of the display market’s biggest players: the recently reinvented AOL.

Despite what he sees as a series of sound management decisions by CEO Tim Armstrong, Khan said he doesn’t expect a real payoff to happen until late next year, primarily because of the damage AOL has done to its own ad sales business. According to his analysis, AOL pulls in 40 percent less ad revenue per user than does display giant Yahoo. That vast discrepancy is the result of AOL’s decision to sell much of its premium inventory through its Platform-A ad network platform under the previous management regime, said Khan.

Therefore, even though the audience for some of AOL’s newer niche content properties is growing at a healthy rate—AOL’s CPM legacy makes it tough to cash in on all that traffic. It will take a while to change that dynamic, predicts Khan. “We believe AOL is more of a late 2011 story, as it will take time to remedy a decade of lack of innovation and expect AOL to remain a turnaround story in the midterm,” he said. “Our analysis shows that rationalizing pricing, reducing the amount of inventory sold through and rebuilding relationships with advertisers could help reduce the pricing gap with the peer group.”