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Media Diaries DebriefInvestment Advisor Directional

Notes

February 14th, 2007

Get Smart:AOL

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3/6/07

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The Present Face of AOL

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AOL - Background• Headquartered in Dulles, Virginia.

• Was once considered the “Goliath” of Internet service providers and at its peak retained over 30 million subscribers.

• In the early to mid 1990s, AOL’s subscription dial-up service was many users first experience with the Internet.

• AOL served to provide users with an ISP and a plethora of content in a one-stop format known now as a “walled garden.”

• AOL also became known as the first name in instant messaging and chat.

• In 2001, AOL became a division of Time Warner and represents 18% of their revenue

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Time Warner Business Portfolio• AOL, one of Time Warner’s five business divisions, generated 18.3% of its parent company’s revenue for 2005.

Time Warner Revenue (2005)

Filmed Entertainment

27%

Networks21%Cable

21%

AOL18%

Publishing13%

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Notes Trouble in the Garden

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AOL the Turtle• Despite being a forefather in dial-up during the 90’s, AOL was slow to integrate faster broadband user capabilities into its business model. Their service was increasingly seen as slower than competitors.

• AOL also held onto its paid subscription model while competitors such as Google and Yahoo were offering e-mail for free.

• AOL’s content was no longer see as cutting edge compared to sites such as MySpace and YouTube. The company came late in seeing that entertainment, not news, was the new king of content.

• Ultimately, AOL was missing out on the ad revenue gains that other major sites were enjoying.

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Leaving the Garden: A New Business Model• AOL devised a new business strategy that involved

making its online services available for free through its website for users with high-speed Internet connections. Dial-up customers must still pay for access.

Three main goals:

1. Attract a bigger audience.

2. Sell more advertising.

3. Increase the amount of time people spend on its web pages and using services like IM. AOL was now moving to an ad revenue based model like Google and Yahoo!

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The Old Guard• A number of management changes have occurred as a result of AOL’s shift of focus from a subscriber-based business to an ad-supported model.

• AOL laid off nearly 600 employees locally and 5,000 worldwide in December 2006.

• Company’s goal was to lay off 26% of its workforce by the end of ‘06 to facilitate the new ad-supported business model.

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The New Guard: Randy Falco • Randy Falco was named new CEO of AOL in November 2006.

• He was previously the head of NBC Universal Television Group for 30 years.

• This new CEO came to Time Warner’s attention during a meeting that involved offering NBC programming Time Warner’s cable systems on a video-on-demand basis.

• It makes sense to have him on board considering AOL’s push to promote its content, particularly video.

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The New Guard: Ron Grant • Ron Grant is the new president and COO and was handpicked by Falco. Previously, Grant was SVP of operations at parent Time Warner. Prior to that, he was SVP of business affairs and development until 2001 when he moved to Time Warner.

• Falco and Grant have instituted a new management structure that involves assigning top executives to narrower roles instead of having multiple tasks managed by a few senior people.

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Ongoing Search for CMO and Innovations Executive

• CMO position is a newly created one that Falco hopes will provide a greater focus on execution and improvements in speed to market.

• Innovations post highlights the need for AOL to provide superior content to support the new free, ad-based business model.

• These positions are yet to be filled.

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Present Business Performance: Bad News• While Time Warner’s revenue increased 4% during 2006, AOL’s sales decreased 5% over this same period.

• AOL subscription revenue declined 14% while ad sales increased 41% during 2006. TW’s subscription revenue increased 10% while its ad sales increased 13%.

• AOL operating income increased 71% while TW’s increased 85%. Note: Most all of this gain came from the sale of a major business division.

• AOL would still be seen as a division not as profitable as the others and in need of a turnaround.

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Present Business Performance: Good News

• AOL is expected to end 2006 with more users than 2005 - the result of offering most of its services for free.

• Increase in users will be the first for the company in four years.

• The surge is a combination of declining paid membership and an influx of free users.

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Notes Braving the Elements: The Competitive Landscape

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The Online Advertising Category• Estimated to be $16 million for 2006 and to grow 24.4% in 2007. All other media is expected to grow only 4.5%.

• Category is expected to more than quadruple over the next five years to reach $82 billion worldwide.

• Search is the most lucrative area with 40% of total online ad spending in the U.S in 2006.

• Next step in online advertising is behavioral targeting, showing ads based upon a web surfers history.

• Marketers such as Ford, GM and Absolut Vodka plan to spend 20% of their budgets on online in 2006.

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Primary Competitors• Yahoo! - Leading Internet services company built on an ad revenue model. Most of the revenue comes from search with a smaller percentage from display and contextual. Also known as one of first leading providers to offer free e-mail.

• Google - Many consider it the leading name in search, helping it to build a very successful ad revenue model. The company also recently acquired YouTube and holds a 5% stake in AOL.

• eBay - the leading online auction site. Also owns PayPal and Skype.

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Primary Competitors• Microsoft (MSN.com)- Second largest ISP in the US. Known for IM service that rivals AOL. Also provides search and content.

• IAC - features brands such HSN, Ticketmaster, Evite and Match.com

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Secondary Competitors• YouTube - Free video sharing site that features both professional and amateur content. Revenue model is ad-based.

• MySpace - Social networking site that is the third most popular in the U.S. Revenue model is ad-based.

• Facebook - Social networking site popular among college students. Generates revenue from banner ads and sponsored groups.

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AOL Strengths• Has relationships with other Time Warner divisions that allow access to content and will engender synergies.

• New and experienced CEO Randy Falco may set AOL on course to innovate and regain relevance among Internet users. His TV experience may be especially helpful.

• Has made some strategic divestitures and acquisitions that may make the business unit more efficient.

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AOL Weaknesses• AOL is perceived as slow, behind the times and irrelevant.

• The firm has shown poor financial performance for several years.

• AOL’s constant changes in upper management that may make it difficult for the firm to ever form a strong corporate strategy and a resulting brand identity.

• The company has been slow to enter the game of building revenues through advertising.

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Notes

February 14th, 2007

AOL Media Spend

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AOL: Advertising by Medium• AOL spent a total of $193 million on television, online and print advertising in 2006.

• 85% of this total ($163.6 million) was allocated to TV, 9% was used online ($18.2 million), while the rest ($11.4 million) was spent on print.2006 Media Budget Spend

TV85%

Print6%

Online9%

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AOL: Broadband TV Spot

QuickTime™ and aSorenson Video 3 decompressorare needed to see this picture.

Campaign based on the idea that everyone should be fast (have fast internet service).

Shows everyday people competing in “fast” events.

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AOL: Print Ad

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Notes

February 14th, 2007

AOL Services and Content

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AOL Music

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AOL MUSIC• AOL Music is the portal page for all AOL partnership

offerings.

• Its clean format differentiates it from the standard AOL feel.

• Marketing Objective: “Communicate the user engagement angle. AOL Music is currently differentiated by high user engagement and level of community.”

• Advertising Objective: “Use out of the box, unique interactive creative to drive page views and unique visitors. Drive usage/trial of Google Gadget.”

• Target: Adults, 22-34

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AOL Music Site

• Artist news• Featured spotlights• Photos of celebs• Full-CD “listening parties”• New songs spotlight

• XM satellite Radio partnership• Napster Link • Highlighted Music Videos• Top 11 video countdown (15,000 videos in library)

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AOL MUSIC {Beta}• AOL has just put out their new music site in Beta.

• It will allow greater targeting in music video searches.

• Lets users to export videos to their Myspace pages

• Saves playlists for users to return during their next visit to the site.

• It archives all news stories, celeb gossip, and old videos and MP3 downloads, and has a search vehicle to help users find the data.

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Of note…• AOL music is now Napster

• AOL Music Now service has been upgraded to a Napster membership as of Jan. 07 (and seems to no longer exist)

• Automatically migrates the 350,000 AOL Music Now members to Napster services

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Also of note..• AOL Sessions

• Over 300 performers, streamed live and then archived. From all genres.

• Google Gadget for Sessions

• Rated one of the top 10 Gadgets of the year (out of 1200+) It places Sessions on your personal landing page.

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• Bought by AOL in 1999.

• Advertising Objective: Solidify and position Spinner as a new and unique brand in online music category. Drive trial/usage of Google gadget.

• Audience: 22-34 core, 18-44 broad

• Hard core music fans. Bullseye is male, 22 yr old, post college.

• Advertising/Marketing effort should focus on long term growth- not one offs.

• Challenge as AOL sees it: Spinner must break thru the clutter and appeal to a thoughtful, cynical, hard core music fan.

Spinner

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• After going through various iterations, Spinner now it now lives as AOL’s hip music hub:

• Blogs, liive music streaming, clips of band interviews and internet radio/new music c.d. trial center.

Spinner, cont

• The DL

•It’s their Youtube-like player that is in Beta and focuses on small,FUSE TV (or early 90’s MTV) cool snippets and band related clips.

• They think of their online radio stations as for “the hipster who has everything.”

•This pains me to say it, but it’s true. They do a solid job.

•Also of note, Spinner.com is just ‘powered by AOL’

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AOL Music: Competitive• Yahoo! Music

• Music page features 120 Launchcast radio stations, music videos, downloads, artist information, and news.

• Music sharing components and ability to check friends’ playlists

• Yahoo! Music Unlimited advertises $6/month for access to 2 million + songs (79c each)

• Customers can pay extra and get their songs “to go”

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AOL Music: Competitive• MSN Music

• Site includes music news, radio stations, music videos, concert schedules, a listening booth, and blogs

• Photos and news heavy

• Interviews and columns seem to be the focus more than subscriptions, although users are pushed to Zune or Rhapsody.

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AOL Music: Competitive• AT&T BlueRoom

• Includes Music, Sports, Gaming and Hollywood sections

• Provides live feeds from music festivals like Coachella, Jazz Fest and Austin City Limits

• Provides Interviews, Behind the Scenes looks and Live performances

• Partnered with Napster

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AOL Music: Niche Competitors• Pandora.com

• Online radio station that streams new music. It matches pitch, tone, and feel of music you list as something you love.

• Last.fm•Very similar to Pandora, but takes the social aspect further by using other users with similar tastes to proffer up new and unique music.

• Pitchfork Media•The premier expert on all alternative (not radio friendly) music. What this small Brooklyn collective says about new albums, goes.

• eMusic•The other iTunes. eMusic gives afficinados a chance to own rare cuts, long lost LP’s, and unlocked MP3’s of their favorite groups (just as long as they aren’t part of one of the mega labels).

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Music category Takeaway • AOL seems to be using Spinner to create a relevant audience

• The ‘powered by’ could prove to be a fundamental shift in the business model

• The category is saturated with content, but Spinner does a great job of aggregating relevant content not found anywhere else.

• Although AOL sessions are amazing and really of value, many of of the artist sets have only been viewed a few hundred times. It lacks awareness.

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Gold Rush

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Gold Rush: The Site

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Gold Rush: AOL’s New Hope?

• It’s a hybrid online reality game conceived by reality show phenom Mark Burnett

• Each week, the site features rounds of questions and puzzles related to pop culture.

•To solve them, users must look for clues on other Time Warner-owned sites like MapQuest, in the pages of People or TV Guide and on CBS shows like Survivor or Heroes.

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How is it played?• Gold Rush starts with 13 gold-filled armored trucks heading out to hide their luggage somewhere across America

• Each round of online play lasts 3 days and new clues are given each day, with a total of 12 rounds

• The first three players who finish the challenges in each round compete against each other in front of web cams for a $100,000 prize

• The winner of that round competes against other round winners for the final $1 million prize which will run on AOL and Entertainment Tonight

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Gold Rush: The Main Point

• AOL and Mark Burnett’s attempt to create a new “prime time”

• It’s taken product placement to a new level

•One challenge was built around songs featuring the word “Chevy” in them

•Chevrolet, Coke Zero, Best Buy, T-Mobile are involved

• Integrates radio, television, magazines, music and film- leveraging Time Warner’s economies of scale and scope.

• Allows for millions of people to play instead of just a lucky few

•Similar to Audi’s “Heist”

•

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Gold Rush: Successful Campaign?• AOL believes it was

• 20 million in revenue

• Reached 11 million viewers, 5 million were unique

• However,

• AOL reports 5 million unique viewers, while Nielson reports just under 1 million

• Nielsen BuzzMetrics (online blog monitor) reported “AOL Gold Rush” only accounted for .002% of all blog posts

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Gold Rush: Season 2• Marketing Objective: Breakthrough clutter to generate buzz for Gold Rush 2

• Advertising Objective: Drive people to play the game

• Audience: Adults 25-49

• Media: Cable TV, Rich media, Flash

• Main Idea: If you’ve ever heard gossip about celebrities, glanced at magazines while waiting in line at the grocery store, or quoted song lyrics and movie lines, you’ve got what it takes to win Gold Rush

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Gold Rush: Advertising Spend• Total spend for the Gold Rush ‘06 Advertising Campaign was $6,179,000. This accounted for 3.5% of AOL’s entire ad spend for 2006• $4,113,000 (55%) was allocated to TV.• $2,066,00 (27%) was allocated to print.• $1,258,900 (17%) was allocated to online

Gold Rush Advertising Spend

TV56%Print

27%

Online17%

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Gold Rush: Television Spend• $3,454,000 (84%) of TV spend was allocated to network ads while $659,000 (16%) was allocated to spot. Gold Rush’s total TV spend accounted for 2.5% of AOL’s TV budget. No dollars were spent on either cable or syndicated television.Breakdown of TV Spend

Network TV84%

Spot TV16%

Where Gold Rush commercials ran:

•CBS Football

•CSI

•Grey’s Anatomy

•Survivor

•Shark

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Gold Rush: Print Spend• 70% ($1.4 million) of Gold Rush print spend was assigned to magazines while 27% ($555,000) was allocated to newspapers and 3% ($20,000) to trades.

Gold Rush '06 Print Spend by Medium

Newspaper27%

Magazine70%

Trades3%

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Gold Rush: Print Advertising

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AOL Living

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AOL Living is…• A landing page for female focused content on the AOL site.

• From home improvement, to book club recommendations, to celebrity gossip and horoscopes, it feels like a general compendium of women's interest.

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AOL Living = AOL Body• AOL Living will soon turn to AOL Body

• Marketing Objective: Develop brand recognition

• Advertising Objective: Create awareness for the launch of AOL Body

• Challenges: Build awareness. Showcase it as a source for best in breed in health, diet and fitness, without overtly promoting Health offerings. (!?)

• Audience: Adults 25+, Women 35+

• Would like creative concepts of Google Widgets

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Other Important AOL Services

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AOL Body {Beta}• Focuses solely on healthy living

• Provides templates for diets and workouts

• Health Encyclopedia: Lists facts on top Health Conditions

• AOL Coaches: Theme on site- Financial Coaches, Dieting, etc.

• There is a tools & research page that would be a good spot to convert many objects to widgets/gadgets -like the calorie burner. (key burner?)

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Notes

February 14th, 2007

Considerations

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Widgets

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Widgets• Small programs that provide users

with specific multitasking functions

• Most popular are Yahoo! Widgets, and Dashboard for Apple

• Google has staked much of its foundation on the application of open source Gagets (what they call widgets) that allow users to customize content on their home pages.

• Yesterday, Google rebranded personal homepages iGoogle to reflect their growing commitment to user created Gadgets

• There has been limited success in creating Mobile Widgets, but since no true standard exists with carriers- lack of Java scrip to display on screen-they are still under-developed in the U.S.

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AOL Widget Opportunity• AOL has content strength

• Many of the properties associated with AOL are aggregated on genre specific landing pages

• AOL has navigation issues

• Massive Clutter

• Widgets can compile all elements of interest under the AOL content umbrella for each user.

• This shifts focus away from perceived weakness of environment that surrounds unique content

• Self-defined relevance for end user

• More eyeballs

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Recommendations

Recommendations

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What they are really saying• They have a need to “develop a winning culture”

• Opportunity to affect internal messaging, branding

• Attract new and quality talent

• Push to reinvent

• “Ask any person what AOL is anymore and they aren’t sure.”-Falco

• Help them establish a new brand identity

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Weakness into a Strength• “AOL is like Chicago after the Chicago Fire.”

• They are so far behind the big guys that they can come out with broadband platforms ahead of MSN or Yahoo.

-Michael Zeman Director of Insights and Analytice, Starcom Mediavest

• Blue Ocean Opportunity

• Branding Internal move to External

• Nimble and Poised to arise from the ashes

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AOL can become the phoenix rising.

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How.• Internal Branding

• Help with the hire of Chief Innovation Officer

• Platform consultation- push Gadgets

• Shift in business model allows for this

• Restructuring of staff bolsters need

• External Push- reinvention.

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Some Thoughts

• AOL reminds all of what happens to a brand when you don’t keep it fresh - it loses its cool. Combating this requires constantly reinventing yourself.

•“American Online became a high school cool back when I was 14...Time passes however (10 years) and you grow up, and seek the bigger and better.” -epinions user

•What AOL is REALLY striving to do is to gain a foothold in three areas: content, social networking and search.

•Will initiatives like Gold Rush achieve this? More importantly, does VBP think that it will want to partner with a company like AOL?

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AOL = Web 1.0

AOL= Web 2.0

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Possible Questions

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Possible Questions- AOL • What is the status of the Chief Innovation Officer?

• What spawned the need for this role?

• Why separate it from the CMO role?

• What impact do you see the CIO having on AOL as it moves forward?

• Do you currently, or are you planning on having, any focus on internal recruiting?

• What endeavor or content can you collectively point to as the future AOL?

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Possible Questions- AOL• What are you doing to position yourself as a Web 2.0 company?

• .What does the relationship landscape with Time Warner look like moving forward?

• Google Gadget implementation seems integral to the future of the AOL. How are you planning to move forward with this partnership?

• Have you thought about AOL taking a backseat to the content?

• E.g.- In2TV, powered by AOL

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