America Online 2010 Annual Report Download - page 49

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2010. Third Party Network declines of $12.6 million reflect a reduction in sales due to increased competition at Ad.com and a reduction in contextual
advertising. These Third Party Network declines were partially offset by $2.3 million related to acquisitions made in 2010.
2009 vs. 2008
Advertising revenues generated on AOL Properties decreased 16%, or $236.7 million, for the year ended December 31, 2009 as compared to the year
ended December 31, 2008, driven by decreases in display advertising and search and contextual revenues. The decrease in display advertising was due to
weak global economic conditions that resulted in lower advertising demand. Specifically, international display revenue declined reflecting weakness in the
U.K., Germany and France and domestic display revenue reflected weakness in certain advertiser categories, including Classifieds, Finance and
Telecommunications. The decline in search and contextual revenue was primarily due to a decline in search revenues due to decreases in search query volume
(partially due to the decline in domestic AOL-brand access subscribers) on certain AOL Properties which contributed $71.8 million to the decline and lower
revenues per search query on certain AOL Properties which contributed $30.4 million to the decline. Contextual revenues declined $10.4 million primarily
due to reduced monetization on MapQuest, partially offset by increased prioritization of certain contextual links in the first half of 2009.
The 17% decrease in advertising revenues on the Third Party Network for the year ended December 31, 2009 as compared to the year ended
December 31, 2008 was due to weak global economic conditions that resulted in lower advertising demand, as well as a decrease of $23 million due to the
wind-down of a contract with a major customer. Revenues associated with this major customer were $3 million for the year ended December 31, 2009
compared to $26 million for the year ended December 31, 2008.
Revenues Associated with Google and Advertising Revenue Expectations
For all periods presented in this Annual Report, we have had a contractual relationship with Google whereby we generate revenues through paid text-
based search and contextual advertising on AOL Properties provided by Google, which represent a significant percentage of the advertising revenues
generated by AOL Properties. For the years ended December 31, 2010, 2009 and 2008, the revenues associated with the Google relationship (substantially all
of which were search and contextual revenues generated on AOL Properties) were $398.4 million, $556.7 million and $677.9 million, respectively.
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" above, with
the majority of the impact occurring in the first quarter of 2011.
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