America Online 2010 Annual Report Download - page 40

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
spin-off. See "Note 13" in our accompanying consolidated financial statements for more detail. Our historical financial information does not reflect changes
that we have experienced since the spin-off or expect to experience in the future as a result of our separation from Time Warner, including changes in the
financing, operations, cost structure and personnel needs of our business. Further, the financial statements for the years ended December 31, 2009 and 2008
include allocations of certain Time Warner corporate expenses. We believe the assumptions and methodologies underlying the allocation of general corporate
expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by us if we had operated
as an independent, publicly-traded company or of the costs we have incurred since the spin-off or that are expected to be incurred in the future. These
allocated expenses relate to various services that historically were provided to us by Time Warner, including cash management and other treasury services,
administrative services (such as government relations, tax, employee benefit administration, internal audit, accounting and human resources), equity-based
compensation plan administration, aviation services, insurance coverage and the licensing of certain third-party patents. During the years ended December 31,
2009 and 2008, we incurred $20.9 million and $23.3 million, respectively, of expenses related to charges for services performed by Time Warner.
Our Business
We are a leading global web services company with an extensive suite of brands and offerings and a substantial worldwide audience. Our business
spans online content, products and services that we offer to consumers, publishers and advertisers. We are focused on attracting and engaging consumers and
providing valuable online advertising services. We market our offerings to advertisers on both AOL Properties and the Third Party Network under the brand
"AOL Advertising." Our AOL-brand access subscription service, which we offer consumers in the United States for a monthly fee, is a valuable distribution
channel for AOL properties.
During the first quarter of 2011, we expect that our advertising revenues on both AOL Properties and the Third Party Network will continue to decline
significantly as compared to the same period in 2010, driven by search and contextual and Third Party Network declines. We believe that advertising revenues
generated on AOL Properties will be negatively impacted by the decline in our domestic AOL-brand access subscribers, particularly as it relates to search and
contextual revenues and the decline in international operations due to ceasing or reducing operations in a number of countries. Visibility into advertising
revenue is limited due to the fact that many advertising agreements are executed during the quarter that the advertising is displayed. Finally, we expect our
Third Party Network revenues will be negatively impacted by the international reductions and closures previously discussed as well as the de-emphasis of our
search engine campaign management and lead generation affiliate products, which are discussed in "Item 1—Business—Third Party Network", with the
majority of the impact occurring in the first quarter of 2011.
Growth of our advertising revenues depends on our ability to attract consumers and increase engagement on AOL Properties by offering compelling
content, products and services, as well as on our ability to monetize such engagement by offering effective advertising solutions. In order to attract consumers
and generate increased engagement, we have developed and acquired, and in the future will continue to develop and acquire, content, products and services
designed to meet these goals. These actions include the development and acquisition of a number of platforms that are designed to facilitate the production,
aggregation, distribution and consumption of local content.
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. In addition to developing and offering engaging
36