NEW YORK - AOL had its slowest quarter of advertising growth since beginning its ambitious transformation into an ad-focused Internet business, increasing uncertainty about AOL's future especially as Microsoft Corp. boosts its ambitions in the same arena.
AOL's $620 million in fourth-quarter ad revenue, reported Wednesday by its parent, Time Warner Inc., represents a year-over-year increase of less than 10 percent. By contrast, AOL's ad revenue grew nearly 50 percent a year earlier.
Ad revenue growth has been slowing down industrywide, but not as drastically.
"It's somewhat disappointing," said David Hallerman, a senior analyst with the research group eMarketer. "It's less than our internal estimates based on their track record earlier (in the) year."
The outlook could get bleaker if the company loses a major, unnamed ad customer this year, according to Time Warner's regulatory reports. Time Warner said earlier that it was anticipating "a significant decline" in revenue from the customer beginning Jan. 1.
Nonetheless, Time Warner executives continued to pin AOL's future on advertising.
Chief Executive Jeff Bewkes said Time Warner aims to separate AOL's ad operations from its dial-up access business, which continued plummeting in the fourth quarter as more people shifted to high-speed Internet service from cable TV and phone companies.
AOL had 9.3 million paying subscribers as of Dec. 31, a third of its peak of nearly 27 million in 2002.
Selling off the dial-up business in the U.S. — as it already has done in Europe — could make AOL more attractive to potential bidders, including Google Inc., which already owns 5 percent of AOL and has a right to trigger an initial public offering of that stake in July.
Roger Kay, who heads the market research firm Endpoint Technologies Associates, called AOL's access business "lead weight," while its ad business is "undernourished (but) has value."
"If it's a clear, clean operation and its metrics start looking better, it becomes an attractive property," Kay said.
But AOL's prospects became murkier last week when Microsoft bid about $40 billion for Yahoo Inc. based on Tuesday's closing prices. A Microsoft-Yahoo combination would not only eliminate two likely bidders for AOL but also create an online advertising powerhouse.
AOL began moving away from its roots as a "walled garden" emphasizing exclusive content in 2004, making most of its news, music videos and other features available for free on its ad-supported sites. It accelerated the transformation in mid-2006 when it started giving away AOL.com e-mail accounts and software as well.
AOL also has been buying other companies to extend its reach and portfolio of technologies.
For four consecutive quarters, the strategy seemed to be working as AOL's year-over-year ad growth exceeded 40 percent. But growth dropped to 16 percent in the second quarter of 2007 and 13 percent in the third before dipping below 10 percent in the latest quarter.
Full-year growth was 18 percent in 2007, compared with 41 percent the year before.
By contrast, Google's ad revenue grew by 50 percent in the quarter ending Dec. 31 and 56 percent in the full year, while Microsoft's increased 38 percent and 32 percent, respectively.
Only Yahoo performed worse than AOL, with ad revenue increasing 6.7 percent year-over-year in the fourth quarter and 8.2 percent in the full year.
Yahoo remains, however, second only to Google in terms of total ad revenue.
Hallerman said he wasn't writing off AOL yet because it still has important assets, including an ad-targeting company it bought last year and video deals through which it can sell higher-priced video ads.
AOL has been consolidating its advertising operations and is moving its headquarters from Dulles, Va., to New York, the heart of the media-advertising industry.
"It's still spring training," Hallerman said.
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