AD SWAPPING GAMES
nypost.com
July 3, 2003 -- In our second installment of Alec Klein's new book on the merger of AOL and Time Warner, AOL executives furiously strike barter deals to make their numbers look better while the merger with Time Warner is pending.
ON a June afternoon in 2000, an anxious AOL executive rushed up to the cubicle of a manager in business affairs, instructing him to draw up documents for a new advertising deal with Sun Microsystems, the giant computer and networking company. It seemed like a perfectly forgettable moment, just another workaday deal. Except for this: The Sun deal heralded the onset of a rash of BA specials through the rest of the year.
The timing of the deal couldn't have been better. With the Time Warner merger pending, the whiteboard in the manager's cubicle was beginning to show fewer new ad deals in the works and more old deals falling apart because financially strapped dot-coms couldn't afford to pay AOL anymore. "It was already clear the deal pipeline had fallen off a cliff," the manager said.
That AOL turned to Sun wasn't surprising. The two companies had a tight relationship. AOL had just spent $300 million buying Sun hardware, which AOL used to expand its vast online network to connect computer users to the Web. Under the new agreement, AOL promised to buy an additional $250 million in Sun hardware over two years. But there was a twist. AOL, short of its revenue targets, needed to sell some ads. Thus, AOL offered Sun a deal: If you buy our AOL ads, we will buy your Sun hardware.
"As an incentive for us to make the above [$250 million] purchase commitment, Sun agreed to purchase $37.5M [million] of ads over the next 3 quarters," a deal maker wrote in an internal memo.
In AOL's parlance, it was called a barter deal. AOL was exchanging goods, computer equipment for ads. But the barter deal was partly cosmetic: The company wanted to make its financial books look more attractive in the eyes of Wall Street when AOL announced its quarterly revenue results.
There was another feature that made the deal even more notable: Sun didn't actually have to pay a dime for those $37.5 million in ads. Instead, Sun would give AOL a credit for $37.5 million worth of computer equipment, and the two companies would call it even.
"They will pay by providing AOL with an equivalent credit for future hardware purchase," the memo stated.
AOL had just found a way to book $37.5 million in ad revenue by essentially agreeing to front the money for the Sun ads. Said an AOL official familiar with the arrangement, "It was fake money." AOL put it a different way in its deal memo. Under the heading "Metrics of Success," the company stated, "Recognize ad revenue in exchange for the additional purchase commitment (achieved)."
The deal was signed off by the company's accounting policy unit. But some within the company were convinced that the transaction hid part of its true intent.
"The bottom line is, it wasn't about the advertising," said a former AOL executive involved in the deal. "AOL didn't care about the value of the equipment. What AOL did was leverage a current relationship and turn it into ad revenue."
Other barter deals followed as the Time Warner merger inched closer to fruition. The company, however, was careful to keep such transactions quiet. "They wanted to keep it under the radar," said an AOL official. As long as barter deals in a single fiscal period didn't exceed 10 percent of AOL's overall revenue, internal accountants reckoned they didn't have to report them in public filings.
In what became known as the 10 percent rule, deal makers, aware of the threshold, were constantly calling over to AOL's internal accountants to see if they had gone too far. Not that there were any irreparable mistakes. If the revenue from barter deals did happen to spill over the line, deal makers were simply instructed to shift the deal to the next quarter. As it was, they made certain they came as close as possible to reaching that 10 percent ceiling.
No opportunity was overlooked. Deal makers even bartered keywords, terms that AOL users could use to search any number of subjects.
When, for example, a movie studio agreed to use an AOL keyword for consumers to find out more about an upcoming film release, the mere mention of AOL was worth a certain amount of money to the on-line company. Officials tracked so-called in-kind barter deals. The company also hired an independent media firm to estimate the worth of such keyword mentions. And then AOL's deal makers went out and traded them for on-line ads. The list of companies with which AOL bartered keywords was staggering. According to a company e-mail from one AOL official to another in September 2000, the list included CBS, CNN, E!, Food TV, HBO, MTV, VH1, the NBA, NPR, Oprah, PBS, Rosie O'Donnell, TVKO, and the Weather Channel. The result: AOL generated tens of millions of dollars in ad revenue from arcane deals about which investors and Wall Street had no knowledge.
"Every quarter, we were trying to max the barter revenue we could recognize," said a former deal maker. "BA was hyperaggressive about it."
* From "Stealing Time," by Alec Klein. Copyright 2003 by Alec Klein. Reprinted by permission of Simon & Schuster Inc. |
