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AOL decline lesson for performance marketers

Written on
Aug 5, 2009 
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DM Confidential  |
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AOL decline lesson for performance marketers

failure_small.jpgDM CONFIDENTIAL – When writing about Microsoft and Yahoo this week, we couldn’t help but think of AOL.

These are three of the largest aggregators of inventory, three of the biggest names in online advertising, each trying to retain and/or regain their former luster. AOL in particular is incredibly interesting. Many people today know AOL more for its aquisitions of Advertising.com, Tacoda, and Quigo than its content. Members of the really old generation will remember AOL as the internet. Way before any social network, if you wanted to flirt with other people and/or waste hours of time online, you had one way of doing it – AOL. But, it came with a catch.

You had to have an AOL account, and that too came with a catch. You had to use AOL to access the internet or to at least access the site if you had access through some other means, such as university provided broadband. This might sound suboptimal, but it was a pretty simple world, especially if you accessed the internet through AOL via its dial-up business. And what a business they built. In 2002, the company had more than 26 million subscribers. It was the gatekeeper to access and content.

aol.jpg

AOL still has roughly 6.3 million subscribers, not bad until you consider that it continues to shed 500,000 a quarter. In the beginning of 2006, for example, the company still had more than 15 million dial-up members. They had been losing an average of 600,000 per quarter up until the middle of 2006. If we focus on the latter part of 2006, though, we see a dramatic acceleration in the percentage subscriber loss, one that lasted for roughly a full year before stabilizing.

That was when the company committed to a radical shift in its business model, to no longer lock down premium parts of the sites for its paying members. Now, anyone could access the entire site and use all of its features, e.g.,webmail . It was a bold move and a tough one, but it was one they felt they had to make. They were losing subscribers already, so had they operated under the existing business model, it would have simply been a game of how long can they last and how much could they stem the bleeding of loosing subscribers. It was a game they would lose one way or the other. They weren’t a search company, so they continued to outsource that piece. They were a content company with lots of ad inventory, so they focused on the aforementioned acquisitions to expand their share of ad dollars.

Few companies in the performance marketing space face the exact same challenge that AOL does, save for Classmates’ parent company United Online, i.e. managing negative subscription growth. Those in the performance space do, however, face the same overall challenge on a regular basis – the concentration of revenue and the sustainability of that revenue.

For AOL. the concentration of revenue was high and it came from an area that would not last. They had to decide how to continue for the future (something they are still wrestling with today). Those in our space do the same thing as offers come and go, so too do certain marketing practices. No one knows how long a given trend will last, so each does their best to make the most of it while they can, which like the dial-up, provides not just cash today but cash to fund other ventures. The challenge is knowing when to say when, especially when times are good. It’s a tough decision – do you take away potential revenue now by diverting time and resources elsewhere or maximize the present opportunity and save for that time? There is no right answer, but the further you go down a road, the harder it is sometimes to try a new path.

Unlike AOL or United Online, at least those in the performance marketing space don’t have the pressure of being a public company and going through the scrutiny they face. Those in the performance marketing space, especially the CPA network / arbitrage space rarely start the companies thinking about such an exit. They usually start the companies sensing an opportunity and see them grow organically from there. A handful have seen an exit, whereas quite a few others would like to see one. But those are two very different worlds.

The low barrier to entry world of the network and the company that starts with the intent of exiting often find themselves at odds. It’s not a gap that is impossible to overcome, but it could easily mean some periods of pain with no guarantee of success. That, however, is at times the gamble, because instead of a focus on cash now, it’s solve the problem now for cash later.

It is a longer-term focus that perhaps toughest of all might mean saying no to certain deals even though they could boost revenues today. Our guess, though, companies will continue with Plan A – grow as much and as fast as possible. Grab your share while you can and focus on tomorrow… tomorrow.

Courtesy of DM Confidential editor





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