America Online 2010 Annual Report Download - page 42

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
opportunities for us to attract new consumers and develop new and effective advertising solutions. As part of a restructuring initiative that began
late in 2009, we announced a plan to reduce operating costs and reinvest up to $100 million of those savings in existing strategic areas. As part of
this plan and to expand our local strategic initiatives, we reinvested the majority of the $100 million in Patch, our community-specific news and
information platform, during 2010. As a result of our additional investment in Patch, we had 790 active towns as of February 18, 2011.
• As the behavior of Internet consumers continues to change, a migration on the Internet towards social networking could adversely affect usage of
AOL products and services. This trend may have an adverse effect on our ability to rely on traditional sources of traffic and revenues. We seek to
mitigate these potential competitive pressures by leveraging social networks to deliver content. Additionally, competition among companies
offering content and advertising products, such as demand-side platforms, is intense. Competitors are providing more free products and services,
for example, data storage, that may require substantial expenditures by us in order to offer comparable products and services. As a result of the
increased competition, Third Party Network advertising revenues may continue to decline.
• Beginning in the first quarter of 2010, we made changes to our content, products and services to enhance the consumer experience (e.g., fewer
advertisements on certain AOL Properties). These changes have involved and may continue to involve eliminating or modifying advertising
practices that historically have been a source of revenues. While difficult to quantify, we believe that these changes had a negative impact on our
advertising revenues during 2010. We intend to ultimately increase our revenues by increasing the attractiveness of our content, product and
service offerings to consumers and therefore their value to advertisers through these enhancements to the consumer experience. Specifically, we
have undertaken efforts on certain AOL Properties to reduce the number of display advertising units, reduce monetization of search results and
reduce the number of contextual advertising links. Additionally, we are shifting our focus from the number of sites that we offer to fewer, bigger
sites that better address the needs of users and advertisers. During the third quarter of 2010, we introduced a new advertising format that seeks to
enhance the consumer experience by improving the aesthetic quality, impact and interactivity of online advertising, while also providing
solutions for advertisers looking for innovative ways to showcase their products and services to consumers. In a departure from traditional
display advertising, the new advertising format offers an ad space segmented into interactive panels, allowing advertisers to customize different
streams of functionality within one interface, which will increase consumer engagement with online advertising. We are also expanding our
distribution of our content, products and services on multiple platforms and digital devices, including on portable wireless devices such as
smartphones and tablets (e.g. iPhone, iPad, Android-based devices and Blackberry).
• As the amount of content that is available online continues to expand, consumers are increasingly fragmenting across the Internet. To address this
fragmentation, we own and we partner with third parties to offer a variety of niche sites (e.g. Engadget and Cambio) that we expect to continue to
drive consumer engagement. We have organized our content to align under the broad categories of either News, Entertainment, Women and
Lifestyle or Marketplace. On February 6, 2011, we announced that we entered into a definitive agreement to acquire The Huffington Post. We
believe that our acquisition of The Huffington Post will solidify our strategy of creating a global content network while providing our consumers
with an array of news, analysis, commentary and entertainment. Furthermore, the Third Party Network, which reaches thousands of websites, will
allow us to continue to provide advertising solutions across a fragmenting Internet environment.
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