The transformation of AOL (TWX) in the last year has been phenomenal. It's reputation and brand were probably at its lowest at the beginning of last year, as its customer service - especially with people wanting to leave it ISP business - was a nightmare, and the negative publicity was everywhere. It was a growing blot on Time Warner's business.
With the decision to quit the focus on being an ISP and changing to an online portal to attract online advertising, the company has become a huge asset for Time Warner in that short space of time. Year-over-year their ad sales increased by 40 percent.
Even with overall revenue decreasing by 25 percent, their operating income increased by 27 percent.
"All of the upside to both revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] was due to a slower than expected decline in subscribers in packages that are available for free or lower prices," Morgan Stanley analyst Benjamin Swinburne said in a research note.
Some are saying that they believe this is only a short-term value to Time Warner, but I'm not sure what they're basing that assessment upon.
When you think of the online ad space and how it's projected to grow for years to come, AOL is sure to get their share of that even though the advertising world is notoriously cyclical. But even with those cycles, online ad dollars will probably not be impacted too much by them with the growth it will enjoy.
Just like all online advertising though, the growth can't continue at these types of rates for long. As Time Warner CEO Richard Parsons agrees with, saying that future growth will not match the growth in the first quarter.
If Time Warner keeps AOL, I think it will perform at a steady rate for them long into the future, even with the inevitable slowdown in online ad revenue growth.
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