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AOL's new CEO Tim Armstrong has been quickly buying up talent and increasing AOL's media properties in the lead up to the company's tkt from parent Time Warner later this year. 

At the Roosevelt hotel in New York today, Armstrong went into AOL's continuing strategy.

AOL's CEO announced that online content can be "much better."

"That's why we are making such a big bet there," he said during a keynote appearance at the annual Media and Money conference, hosted by Nielsen and Dow Jones.

It's true that content online has a long way to go. But is AOL the one to make it happen?

Armstrong has been able to make such a big play in the content market because of AOL's large subscriber base. (As most media companies shed employees over the past year, AOL has been hungrily picking up journalists.)

But dial up subscribers will soon be a thing of the past, and AOL has a finite period of time to prove it can draw readers without the assistance of its dial up business.

According to Time Warner's SEC filings this week, AOL’s dial up subscription service accounts for the “vast majority” of its operating income, but is steadily dwindling, as consumers look to broadband and cable internet providers.

AOL's revenue through the third quarter was $2.45 billion, with operating income for the same period of $449 million. But subscriber revenue was down 29% and ad revenue was off by 18%.

As AOL's stable of internet subscribers slide away, the media side of the business will have to prove it can draw viewers with popular content instead of a group of viewers directed to AOL sites from their internet service provider.

That's why Armstrong is bulking up the company's content properties. Today, he reiteratd AOL's theories on using content to attract revenue:

“AOL is one of the largest properties online to reach women. If you're a Proctor & Gamble or a General Mills, as long as you know it's AOL content, you don't mind that it's bundled.”

But AOL's growing group of blogs and media properties will have to prove that they can draw attractive audiences for advertisers without the help of AOL subscribers by this time next year.

That's when AOL's deal with Google runs out.

Google currently generates one-third of AOL's advertising revenue and nearly half of the revenue for AOL Media, which Armstrong is investing his time and energy building up.

The search giant invested $1 billion in AOL in 2006, in exchange for a 5% stake and the right to provide search results and advertising while splitting the resulting revenue.

But in the first nine months of this year, revenue from the Google partnership slipped to $422 million from $513 million for the same period in 2008.

Google's own search business has remained stable despite the  decline is steeper than Google's own search revenue decline, but the loss of AOL dial up subscribers let to lower search query volume. The rest of the blame falls to lower revenues per search query, according to AOL filings.

Alternatives for search providers are limited, and every month there are set to be even fewer AOL dial up subscribers, meaning that AOL properties will increasingly have to pull in readers on their own merits.

Google's deal with AOL runs through the end of 2010, meaning Armstrong has a year to get his advertising against better content strategy off the ground before revenues really become a problem.

Meghan Keane

Published 13 November, 2009 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

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