AOL TIME WARNER
Suzanne Plunkett  /  AP
Workers pass by the former headquarters of AOL Time Warner in 2002, before executives stripped AOL from the name of the merged company.
By Martin Wolk
msnbc.com
updated 10/19/2005 5:39:57 PM ET 2005-10-19T21:39:57

Microsoft, Google, Yahoo and Comcast all have their own reasons for pursuing a minority stake in Time Warner’s America Online unit.

But one thing is clear from the frenzy of speculation over the future of the Internet property: After years of disappointment that followed the dot-com collapse, online advertising is suddenly hot.

Internet advertising, which slumped to just $6 billion in 2002 from more than $8 billion in 2000, has rebounded dramatically and is expected to grow 34 percent this year to nearly $13 billion, according to eMarketer, a research firm. The market is tightly concentrated, with more than half the sales going to just four players: Microsoft’s MSN, Yahoo, AOL and Google. (MSNBC is a joint venture of Microsoft and NBC.)

While the Internet is still just a small fraction of the $60 billion market for television advertising, the rapid growth makes the sector a bright spot in an otherwise mature market that is suffering this year from a sluggishness that is typical of odd-numbered years, which lack national elections and Olympics.

“Over the last couple of years it has become clear to everyone that the Internet is here to stay and there is a lot of audience there,” said David Hallerman, a senior analyst at eMarketer. “There is no longer a boom-and-bust mentality.”

From Amazon.com and eBay to online travel agents like Travelocity and Expedia, plenty of multibillion-dollar businesses have been built through online advertising, marketing and sales. The difference now is that major brand-name advertisers including car makers and consumer-product companies are now jumping onto the Internet bandwagon in droves.

James Rutherford, executive vice president of Veronis Suhler Stevenson, an investment bank, said marketers are being attracted in part by new ad presentations that are far more sophisticated and compelling than the static banner ads of yore. But more important is the unique ability offered by the Web to track just how effective any ad campaign might be.

“The interactivity of the medium makes it a lot more measurable than any other medium out there with the exception of direct-response television,” he said. “Even if people are not responding, you can measure what what they are viewing and what they click on. … It’s a terrific way to advertise because you know what you are getting for your ad dollar.”

Veronis Suhler estimates Internet advertising will grow at an average 24 percent a year over the next five years, compared with just 7 percent for the advertising industry overall and 4 percent for network television.

By 2009 online advertisers will pay $28 billion nationwide, more than consumer magazines will generate from advertising and circulation combined, Rutherford said.

Within online advertising, nothing is hotter than the so-called keyword search advertising that is the core of Google’s business, which generated $4.5 billion in revenue last year.

“Keyword search has been the key driver of the resurgence in online advertising,” said Jeff Lanctot, a vice president at Avenue A/Razorfish, the largest ad agency that works exclusively in online media. “(Keyword search) has brought an accountability and efficiency in driving sales that is really unprecedented in the advertising business.”

Lanctot says marketing “is the last bastion of corporate America that doesn’t have very strict accountability tied to it,” and online advertising has the potential to change that. With keyword search, for example, marketers have the chance to say exactly how much they are willing to pay for each visit to their Web sites, and then to adjust their bid depending on how many visits are converted into sales.

The importance of this type of advertising is one reason Microsoft is focusing so aggressively on search, offering a new product that breaks down the price even further depending based on demographics. For example, a marketer might be willing to pay more for clicks from women, depending on the product being offered, Lanctot said.

The rapid growth of the advertising market in general and keyword search in particular is what has suddenly made America Online a hot property again more than four years after its hugely disappointing merger with Time Warner.

While AOL is losing subscribers at a rapid clip, with 900,000 people canceling in the latest quarter, the service still has 20 million paying members and is seeking to broaden that audience by making more of its news, entertainment and features available for free to the wider Web world.

AOL ranks No. 4 in Web advertising revenues with about a 9 percent share, said David Card, senior analyst at Jupiter Research.

AOL is under pressure from investor Carl Icahn to take some type of aggressive action to boost its stock price, which has languished in the $17 to $19 range for the past three years, and Time Warner Chairman Richard Parsons told an investor conference last month that he expects AOL to be the “real drive” of an enhanced stock value, both in the short term and the long term.

Parsons has ruled out a sale of AOL but has said that Time Warner does not need to own 100 percent of the online unit to “mine” its value.

“What Time Warner management is saying is, ‘We like AOL,’ and I believe them,” said Card. “I don’t think they want to unload AOL. … AOL can be a growth engine for them Internet advertising  is back with a bang, and the access business is spinning off cash.”

Of all the suitors mentioned, analysts say Microsoft has the most to gain through a partnership with AOL, which could help it battle against its increasingly dangerous rival Google.

Microsoft has made increasing penetration of its search engine one of the company’s top priorities, in part to head off Google’s efforts to make its widely used search page the foundation for a platform of technologies that could chip away at Microsoft’s core business of desktop computer systems and application.

AOL currently uses Google’s search technology, and Card said it would take a “mighty sweet deal to pop them out” in favor of Microsoft.

And Google, rich with cash from its latest $4 billion stock offering, has plenty of assets to protect itself from that kind of unwelcome raid.

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