Wayne Pace, CFO
Now moving on to AOL. Revenue declined 3%, due mostly to a 13% decline in subscription revenues which reflected continued subscriber losses. The decrease was offset in part by a 46% increase in advertising revenues, which benefited from solid growth across advertising run on third-party websites generated by Advertising.com, as well as display and paid search advertising. OIBDA rose 21% as lower costs and higher advertising revenues more than offset the impact from lower subscription revenues.
As we have previously communicated with you, we began to significantly reduce subscriber acquisition marketing during the third quarter. In fact, total marketing expenses declined $177 million compared to the prior year quarter. Our third quarter results also included $27 million of restructuring charges associated with AOL's strategic changes. We do expect to incur between $150 million and $240 million of additional restructuring charges during the fourth quarter.
This next slide highlights AOL's audience metrics for the third quarter. Domestic ad revenues less traffic acquisition costs, or TAC, of $304 million increased 3% sequentially from the second quarter. Third quarter unduplicated monthly domestic unique visitors averaged 112 million. Compared to the second quarter, total domestic page views declined 6% to about 49 billion, and domestic ad revenue, less TAC per 1,000 page views, increased 9% to $6.24.
Moving to AOL's membership base. In the third quarter, domestic AOL members declined by 2.5 million to 15.2 million. Monthly ARPU of $19.30 decreased slightly compared to the second quarter, but grew modestly over the third quarter of last year. The decline in domestic AOL members this quarter was higher compared to the second quarter for two main reasons, both of which are related to the strategy changes AOL announced on August 2.
First, 1.5 million members migrated to the free service, including approximately 400,000 subscribers associated with an agreement between AOL and Time Warner Cable. Second, there were around 350,000 fewer registrations in the third quarter, which reflected the lower acquisition marketing expenditures under the new strategy I mentioned a moment ago.
And later in the Q&A:
Jessica Reif Cohen - Merrill Lynch
Thanks... you said that you expect AOL advertising to grow next year in line with the market. Can you quantify the range you expect the market to grow?
The reason we articulate it the way we articulate it and said that we will be at least on the market is I have seen estimates all over the place anywhere from high-teens to the mid-30s. I think it is going to be robust, and I think we have taken domestic share, at least, in the last two quarters. We see at the rate that AOL is monetizing these eyeballs, with usage starting to grow, we don't see any abatement on that front. So whatever it turns out to be within that range, I think we will be on it or above it.
Let me add to it and give some context for AOL. Because as Wayne and Dick reported, the ad revenues were up 46% year over year. We were up 6% sequentially after a 40% ad growth and revenue gain in the second quarter. It is important to look at some of the pieces of that. Monetization is part of this, and our revenue per thousand grew 60% year-over-year to $6.24, it was up from $3.85 last year, and it puts us solidly in the ranks of our two closest competitors.
Put the ad revenue in the context of the total AOL plan. As we said on August 2, we were very happy and encouraged with what is happening. Our main goal is to maximize users for AOL, whether they are registered free users or whether they are paying subs, and then we want to increase their engagement, which is obviously what we monetize. We have turned this around since the August 2 changeover, and we're on track to grow both total users and page views next year in 2007.
To do this, as we have said, we have really three basic legs to the strategy. One is to reshape the access business by making AOL free to anyone with broadband. The second is to drive engagement and monetization. The third is to reduce costs. So, at the end of the third quarter, we had about 3 million free AOL e-mail accounts. Two-thirds of these came from converted members who, before we made this change, they used to leave the service and they used to leave the ad base. But that also means we added 1 million new free users, over 1 million new free users that were not with us two months ago.
Our unique visitors were stable at 113 million, which is a very important part obviously. It is the foundation of the advertising business. The big news for us is that the page views decline in this quarter was only 5%. If you take out the fact that we moved our Time publishing titles out of the AOL, we only had a page view decline of 3%, and we started this change a month into the quarter. So what we are looking at here is page views turning around and starting to grow pretty soon.
On the cost side, which is the last part, we're on track solidly. It is a lot of work going into this to cut at least $1 billion by the end of '07. At the rate we're going, we will do considerably better than that. So between all those points those are the things that underpin the ad growth rates, and we're having growth in advertising, Jessica, from all the product categories. We had Ad.com, our third-party business, grew 95%. Our display ads grew 39%, and search grew 27%. The more people we have using this service and the more engagement in page views that we have per user -- because our usage is holding up as people move over to free, which is another big part of the success of this -- that will also and does drive search activity and revenue.
Finally, we are in partnership with Google on search. So when we take our traffic and put it into that search category, it performs extremely well.
The last thing, Jessica, I would add to that, I think it is fair to say although we are not going to give specific estimates for next year, it is fair to say we are not counting on the kind of growth that we have been delivering for the last couple of quarters. We would be happy to have it, but we are not counting on it.
William Drewry - Credit Suisse
Thank you. I just wanted to stick with AOL for a couple of questions. I was just wondering, Jeff, does each division now have its own separate Internet strategy? You had an announcement out of Turner today. They seem to be pursuing a lot of things, and now this new deluxe network. I was just wondering how each of the divisions are working with AOL at this point going forward?
Also, I just wondered if you could quantify the marketing cost opportunity capture for next year?
And then just one other thing. I guess Jonathan Miller had some comments last week that put speculation into the market about the future of AOL. I was just wondering, is there any reason why AOL, given this great success that you're having right now, is not a core asset for the company going forward? Thanks.
Well, AOL is definitely a core asset for the company and growing really well. On your digital question across the different businesses that Time Warner is in, Time Warner is the leading industry participant in five different industries: film, networks, publishing, cable, et cetera. Each of those industries has obvious online or digital strategies. We have them in each of our companies as we would if they were standing on their own
But having said that, there is tremendous advantages of some of the things that we can do together. As for AOL, there are numerous products, for example, into TV with Warner Brothers, the combination of TMZ and People celebrity sites, which are the leading celebrity sites on AOL. There are so many; it is hard to remember. There is also, of course, things like the CNNMoney/Fortune cooperation between our publishing company and our Turner/CNN business, which is already the fourth-largest finance site. There are joint ventures underway with HBO and AOL in comedy.
There are just a tremendous number of ways that if you look at it say, from my position, where we look at essentially a common set of metrics across our different businesses. If you go through from publishing to networks into AOL, all of them need to focus on unique visitors and driving traffic.
We have terrific leadership, say, in our print leadership branch. Just to use one, let's say, People. It has got about 40 million readers in print. We've got over 5 million uniques already on the People.com site, 250 million page views a month so it is the leading celebrity cite online. Sports Illustrated is 450 million page views a month.
Basically when we get together, we look at all these businesses from HBO to CNN to People on both the previous distribution method, which is either the printed page or the television screen, and increasingly the new distribution method, which is a broadband PC screen or a mobile device screen, and the things that we learn in one division, we can apply in another.
Bill, you know, your question is a good one in that it does point to something that I would say has a subtle but significant difference in the way we are thinking about the interrelationship with all these businesses and assets. As Jeff has just indicated, each of our operating divisions has to have its own Internet strategy, its own strategy for moving its brands or its businesses onto the web. AOL can be sometimes a partner in that and sometimes offer some assistance in terms of insights into that. But each of these businesses has to have its own strategy for how it is going to meld the digital opportunities the technologies present.
Now in terms of AOL being a core asset, when you think about what we're trying to do with that asset, which Jeff was explaining to Jessica in some earlier questions, we're trying to make it a more robust audience/advertising platform. Because as we see from our other businesses in fact, advertisers are moving online, advertising dollars are shifting online. What do we in our combination of businesses here in Time Warner? We have content revenues. That is one revenue driver. We've got subscription revenues. That is one revenue driver. We have got advertising revenues.
But we want to be in that game, in the online game, and where we can do it more robustly is AOL. So AOL is a core asset of our portfolio because it is in one of the three big revenue driving streams that we fish in. As Jeff said, we're very pleased with what is going on in terms of the new strategy.
So I am not 100% sure exactly what musings that Jon Miller, who is doing a terrific job in terms of moving us to the strategy you were talking about, but it is a core asset, and I think we have got it on the right track.
I thought -- Jon was over in Europe, and we just did the AOL Europe deals where we moved out of access and increased our footprint in audience and advertising. I think in response to questions if you are in Europe how does this apply to the United States? We would all say that we always evaluate any alternatives that are more profitable in the long run. The long run is key to making that assessment.
Your next question comes from Anthony Noto - Goldman Sachs.
Anthony Noto - Goldman Sachs
Thank you very much. As I analyze the different drivers of advertising at AOL, the AOL business for advertising, excluding Ad.com, looks like it is up 33%. When I peel through the advertising growth that has been driven by RPM growth versus page view declines, it basically looks as we go into 2007 that you need to have 15% to 20% RPM growth again, with low single-digit page view growth in order to get to what we have for industry growth in online advertising.
So my question, Jeff, specifically is, do you think you can get mid-teens to 20% growth in RPM again in 2007? And if not, what would you be assuming on the page view growth side to get to the industry growth rate? Thanks.
You know, let's go to the page views. As we said, the decline is now down to 3% if you factor out moving our own titles out of Time Inc. That is in the first two months of a change where out of the three months of the quarter, one of them we were under the old method. What that means to me, if you look of the last two or three years, page views have been declining there because of the loss of paying subs in the 15% a year or more range. That is over with. So that means page views won't be declining for that reason.
We think users will go up if you look at paying plus free registered users, and as we have said, that means the page views are going to increase. I'm not going to give a specific mix of what we're going to do with page views versus what we're going to do with RPMs. I'm not sure if I'm allowed to give specific guidance on ad growth rates in relation to the industry.
Inherent in your question is, we feel very good about how we are going to do in ad revenue growth in relation to industry ad revenue growth in online. That will come from a combination of the two things you mentioned. Just to finish, I don't think it is unreasonable for us to do RPM growth in the neighborhood of what you asked about.
Anthony Noto - Goldman Sachs
Do you also consider any risk to companies like Yahoo! that are only selling 50% of their page views, basically flooding the market with a lot of second-tier inventory through processes similar to Advertising.com through their investment in Right Media, and could there be any risk of deflation in pricing as it relates to the inventory that you're really selling at a much higher rate today?
Are you asking whether our competition is flooding the market with not so good inventory?
Anthony Noto - Goldman Sachs
Up until this point, Yahoo! has only been selling about 50% of its page views, and they are finding it more and more challenging to compete with the methodologies of selling through companies like Advertising.com and other competitors. And so they have made a strategic shift to try to sell a much greater percentage of their page views that previously they had not sold because it would have diluted their pricing on their premium product.
So, as they start to try to sell through 70% to 75% of their page views instead of 50%, there is going to be a lot of other available inventory at much, much more competitive pricing than we have seen in the past. Is that a factor that is weighed into your outlook for 2007?
Yes, we are not worried about that. Two advantages. One is what I was trying to explain, which is engagement. As we said when we shifted over on August 2, we have a user base at AOL that has the strongest, the longest session online, the most page views on the web. We have got an extremely engaged user base, and we see that holding up as they move over to free registered user status. Combining that with our capability at Ad.com and in other parts of AOL and video advertising, to monetize not just our own inventory but everybody else's, we are actually, I think, increasing our competitive position in that field. So those trends you cite are good for us.
The one thing I would add to that is that in your analysis, what is different for us I think or I don't want to say it is confusing, but page views and usable inventory are not necessarily the same thing. So, as you are aware, we have actually been growing our available inventory through the year with the inclusion of the client email, which is obviously a big category online, a premium category in terms of pricing. So I think we see pretty good headroom in front of us in terms of our ability in the mix to have good increases for RPMs, whether it is from both volume and inventory mix.
Excerpted from the full transcript of the Time Warner earnings call.