America Online 2009 Annual Report Download - page 43

Table of Contents
significant risks." As our subscriber base declines, we need to maintain the engagement of former subscribers and increase the number and engagement of
other consumers on AOL Properties. We seek to do this by developing and offering engaging content, products and services. Further, we have transitioned
and will continue to seek to transition a substantial percentage of those access subscribers who are terminating their paid access subscriptions to free AOL
Properties offerings. One of the metrics we monitor related to our subscription access service is monthly average churn, which represents on average the
number of AOL-brand access subscribers that terminate or cancel our services each month, factoring in new and reactivated subscribers. The domestic AOL-
brand access subscriber monthly average churn was 3.4%, 3.6% and 4.6% for the years ended December 31, 2009, 2008 and 2007, respectively. Recently
there has been a moderation in monthly churn, reaching 3.0% in December 2009. The average paid tenure of the remaining domestic AOL-brand access
subscribers has been increasing, and was approximately 8 years, 7 years, and 6 years as of December 31, 2009, 2008 and 2007, respectively.
Historically, our primary subscription service has been our subscription access service. Moving forward, we seek to develop, test and market new
subscription products and services that are either owned by us or by third parties. To facilitate this goal, we are planning to develop a single, open, consumer-
facing platform that will allow us to manage and distribute these additional subscription products as well as our subscription access service. We plan to offer
those subscriptions to our access subscribers and to other Internet consumers.
For the years ended December 31, 2009, 2008 and 2007, our subscription revenues were $1,388.8 million, $1,929.3 million and $2,787.9 million,
respectively. Our subscription revenues have relatively low direct costs, and accordingly, our subscription access service represents the source of the vast
majority of our operating income. Although our subscription revenues have declined and are expected to continue to decline, we believe that our subscription
access service will continue to provide us with an important source of revenue and cash flow in the near term. The revenue and cash flow generated from our
subscription access service will help us to pursue our strategic initiatives and continue the transition of our business toward attracting and engaging Internet
consumers and generating advertising revenues. We expect our total revenues and operating income to decline in the near term and foreseeable future, even if
our strategy is successful and we are able to grow our advertising revenues, primarily due to the continuing decline in our subscriber base.
THIRD PARTY NETWORK
We also generate advertising revenues through the sale of advertising on the Third Party Network. Our advertising offerings on the Third Party
Network consist primarily of the sale of display advertising. In order to generate advertising revenues on the Third Party Network, we have historically had to
incur higher traffic acquisition costs ("TAC") as compared to advertising on AOL Properties.
We plan to expand the Third Party Network in order to allow us to serve many more publishers and advertisers than at present. We currently market our
offerings to publishers under the brand "Advertising.com". A significant portion of our revenues on the Third Party Network is generated from the advertising
inventory acquired from a limited number of publishers. Accordingly, we intend to make strategic investments in order to expand the Third Party Network
and related advertising solutions.
In the fourth quarter of 2009, we began proactively de-emphasizing the search engine campaign management and lead generation affiliate products on
the Third Party Network in order to focus and strengthen our efforts in display advertising solutions. Given the relatively high level of direct costs associated
with these products, we do not believe that this change will have a significant adverse impact on operating income in 2010. During 2009, we generated
approximately $100 million in revenue related to these products.
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