AOL hopes for comeback

SAN FRANCISCO - AOL is shaking loose from Time Warner Inc. and heading into the next decade the way it began this one, as an independent company.

Unlike the 1990s, though, when AOL got rich selling dial-up Internet access, it starts the 2010s as an underdog, trying to beef up its Web sites and grab more advertising revenue.

Despite a few bright spots in its portfolio of sites, such as the tech blog Engadget, the new AOL Inc. has a long way to go until Web advertising can replace the revenue it still gets from selling dial-up Internet access. One especially popular property, the entertainment site TMZ, is a joint venture with Time Warner, which will keep TMZ and its revenue after AOL splits off.

Now investors are getting a chance to place bets on AOL.

Tomorrow, Time Warner shareholders as of Nov. 27 will get one share of AOL for every 11 of their Time Warner shares. And on Thursday morning, AOL chief executive officer Tim Armstrong is set to ring the opening bell at the New York Stock Exchange as AOL shares will begin trading. Its ticker symbol will be AOL, the same one it had when it was known as America Online and used $147 billion worth of its inflated stock to buy Time Warner in 2001.

The parent company was even known as AOL Time Warner in the heyday. At the time, Time Warner thought its movie, TV, and magazine content would benefit from ties with AOL's Internet-access business.

But the media conglomerate announced AOL's spin-off in May after years of trying unsuccessfully to integrate the two companies.

AOL will initially be worth about $2.5 billion, based on the value of preliminary AOL shares that have been trading ahead of this week's formal spin-off. AOL will have no debt, and the company is profitable, though income has been falling: Operating income dropped 50 percent to $134 million in the third quarter this year compared with last year.

In the last year, AOL hired Armstrong, 38, a former Google advertising executive, to engineer a turnaround that has eluded the company while it was part of Time Warner.

In those years, AOL struggled to complete its transition away from relying on its dial-up business. The service peaked in 2002 with 26.7 million subscribers and has declined steadily as consumers switched to broadband. In the third quarter, AOL had 5.4 million dial-up subscribers.

Even with the decline, this business brought in $332 million during the quarter, or 43 percent of AOL's total revenue. But that's down from $1.8 billion, or 82 percent of revenue, during its peak quarter seven years earlier.

Overall, AOL's third-quarter revenue dropped 23 percent from last year to $777 million.

AOL has tried to offset the fading service by moving away from its origins as a "walled garden" with subscriber-only content to a network of online destinations with free material, supported by ads. AOL even began giving away AOL.com e-mail accounts.

The results have been mixed. After initially showing promise, AOL's ad revenue fell last year and in each of the first three quarters of this year. AOL's advertising shortfall in the third quarter - an 18 percent decline from the same period a year ago - was much worse than the 5.4 percent drop in the overall Web ad market, according to PricewaterhouseCoopers L.L.P.

Another problem: AOL's more than 80 Web sites are struggling to keep their viewers. In the third quarter, AOL's network had 102 million unique visitors in the United States, according to comScore, a 7 percent drop from 110 million a year ago. By contrast, Google and Yahoo both showed gains of more than 10 percent.

AOL has responded partly with plans to shed up to 2,500 jobs, or more than a third of its employees, in an effort to save $300 million a year. That comes on top of thousands of other cuts in recent years and will leave the company at less than a quarter the size it was at its peak in 2004.

But the cost-cutting has allowed AOL to stay profitable despite shrinking revenue.

AOL also is trying to produce online material far more cheaply. It plans to launch dozens of new sites next year and populate much of them with work done by freelancers.

Businesses: Provides e-mail and dial-up Internet

services, operates about

80 Web sites.

Employees: 7,000 in 18 countries.

Nine-month revenue*: $2.4 billion, down 23 percent.

Nine-month net income*: $247 million, down 43 percent.

Dial-up Internet subscribers: 5.4 million.

Number of shares of common stock: About 106 million.

Shareholders: About

one million.

Stock exchange: New York.

Dividend: None planned in the near future.

*January-September 2009 vs. 2008

SOURCES: AOL Inc., Associated PressEndText