The advertising market stinks, and media companies are stuck with gobs of commercial time. So the world’s biggest media company has come up with a solution: touting its own products on its own platforms
AOL Time Warner Inc. has been flooding some of its media properties, such as cable networks CNN and TNT, with ads for other parts of the company, particularly America Online.
AOL disclosed in a Securities and Exchange Commission filing that it had boosted the amount of intra-company advertising — like ads for America Online on TNT — to $252 million in the first nine months of this year, compared with just $12 million on a pro forma basis for that period in 2000.
The intra-company ad deals have helped offset the impact of a downturn in the ad market on company divisions that sell advertising, including Turner cable networks, America Online and Time Inc. magazines. Intra-company sales hit the highest level so far this year in the third quarter as the ad environment deteriorated. AOL said it plans to keep up the intra-company deals.
Intra-company transactions get cancelled out on consolidation of divisional results, and AOL noted that the transactions don’t affect consolidated revenues or earnings before interest, taxes, depreciation and amortisation, the measure of profitability the company likes to use.
But it argued that profit margins can benefit “to the extent” that divisions that had spent a lot of money on advertising are pumping more of that money into sibling divisions.
AOL also believes the practice reflects its confidence in its own media. AOL chief executive Mr Gerald Levin told analysts last month, “We are now using particularly the [America Online] medium as the most effective medium to sell almost all of the Time Warner products.”
Wall Street analysts think the practice makes sense in a weak advertising market. Aside from helping to promote the company’s own products, intra-company deals probably helped to maintain ad rates a little, said Mr Scott Davis, an analyst with Wachovia Securities.
Meanwhile, AOL also revealed in Wednesday’s filing that it had “recently” received a “non-binding notification” from Bertelsmann AG that the German media company probably would exercise the first installment of an option to sell its 49.5 per cent stake in AOL Europe to AOL for between $6.75 billion and $8.25 billion.
The first instalment, which covers the bulk of the stake, is for $5.3 billion. Bertelsmann can exercise the option over the instalment between December 15 and January 15.