AOL ad revenue plummets in Q1

AOL's ad revenue fell 20 percent in the first quarter year-on-year, another troubling sign that its transformation into an advertising-supported business is off track.

At the same time, parent company Time Warner is looking for alternatives to spin off the struggling Internet unit.

While the economic crisis has affected online ad spending, AOL's drop is still steep. By comparison, Google, which generates most of its money from online ads, grew its revenue 6 percent in the first quarter. Yahoo, another online ad powerhouse with significant problems of its own, had a 13 percent contraction in first-quarter revenue.

The problems in AOL's online ad business appear widespread. In its 2009 first quarter earnings report on Wednesday, parent company Time Warner said AOL registered revenue declines in ad sales on external sites, as well as in display and paid-search ad sales in AOL sites.

In a filing on Wednesday with the U.S. Securities and Exchange Commission, Time Warner said it's still reviewing its "strategic alternatives" regarding AOL.

Although Time Warner's board hasn't decided on this possibility, Time Warner "anticipates" it will start a process to spin off "one or more parts" of AOL's business to Time Warner stockholders. However, market conditions may lead Time Warner to seek alternatives other than a spinoff, according to the filing.

Talks about a possible AOL divestiture by Time Warner have been rumored for years, and the issue has been discussed by Time Warner executives in the past.

Overall, AOL's revenue, which also includes subscription fees, fell 23 percent to $867 million, while operating income tumbled 47 percent to $150 million. Time Warner blamed its first-quarter 7 percent revenue fall partly on AOL's financial performance.

Time Warner booted Randy Falco from his post as AOL CEO last month, replacing him with former Google executive Tim Armstrong.

Under Falco, who took over in November 2006, AOL routinely failed to grow its ad revenue on par with the industry average. Falco's tenure included two major rounds of layoffs: 2,000 employees, or 20 percent of AOL's staff, in October 2007, and 700 employees, about 10 percent of the staff, in January of this year.

AOL has been on a years-long process to transition from a business model based on dial-up Internet access fees to an online advertising supported model. However, since early 2007 AOL has consistently underperformed in online advertising.

For example, in 2008, U.S. online ad spending grew 11 percent, according to the Interactive Advertising Bureau, but AOL's online ad revenue dropped 6 percent.