America Online 2011 Annual Report Download - page 38

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Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• We believe that there is a significant strategic growth opportunity in providing local content, platforms and services covering geographic
locations ranging from neighborhoods to major metropolitan areas. Patch is our community-specific news and information platform dedicated to
providing comprehensive and trusted local coverage for individual towns and communities. We have made, and for the foreseeable future will
continue to make, investments in Patch and, as of December 31, 2011, we had 863 active Patch towns. We have been focusing on and continue to
focus on developing and offering compelling local content and growing user engagement within Patch towns. We have increased our focus on
local advertising and commerce opportunities as we enter the next phase of our development of Patch.
• 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 our content.
• We believe there is growing advertiser demand for innovation in online advertising formats to be more conducive to product branding and to
more closely mirror experiences offered by offline formats. To address this opportunity, we are offering more premium advertising formats,
including a format that we internally refer to as "Project Devil". Additionally, we acquired Pictela in December 2010 in order to scale our
delivery of video, photos and applications, both within the new advertising format and generally across AOL Properties. Our premium formats
seek 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. The Project Devil advertising format
is being offered to advertisers on the vast majority of AOL Properties as well as through the Third Party Network.
• The method of internet access continues to shift away from dial-up access. This trend, along with the free availability of the vast majority of our
content, products and services, has contributed to, and we expect it will continue to contribute to, the decline in the number of our current
subscribers. As a result of these factors, we expect subscription revenues to continue to decline in the future. We continue to expand our offerings
of online products and services to our subscribers and other consumers. We have evolved our subscription offerings to provide value in addition
to access, such as computer tools, maintenance and warranty services, online technical support, anti-virus software, identity theft protection,
online and social media privacy and reputation monitoring services. We expect that these products will allow us to continue to grow new
subscription services and expand our consumer base beyond existing subscribers.
• We have made progress towards achieving our strategy through targeted acquisitions and opportunistic dispositions. We made a number of
acquisitions in 2010 and 2011, and we expect the integration of key talent and products resulting from these acquisitions to help us achieve our
objective of increasing traffic by enhancing the user experience. To accelerate our strategy, we acquired The Huffington Post which we expect to
allow us to deliver a scaled and differentiated array of premium news, analysis, commentary, entertainment and community engagement. As a
result of our 2010 and 2011 acquisitions, we are increasing video streams and reach through video platforms and networks offered by 5Min and
goviral and improving premium format advertising offerings through Pictela.
• Part of our strategy with respect to targeted acquisitions is to ensure that the key employees are incentivized to remain with AOL following the
acquisition. In connection with our 2010 and 2011 acquisitions, we entered into certain incentive cash compensation arrangements with key
employees of
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