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AOL's Ad Swapping Games
from the revenue-from-nothing dept
Following on yesterday's excerpt, the NY Post is now running another short excerpt from Stealing Time, the new book about AOL. This one focuses on the famous ad swapping deals, where AOL would make some deal in exchange for someone agreeing to buy ads on the site - and then they knock out the difference and call it even - though AOL would still record the revenue. The story focuses on a deal with Sun. AOL agreed to buy machines from Sun in exchange for an ad buy. Then it appears Sun basically knocked the price of the ad buy off the price of the machines. I'm a bit confused as to what's wrong with this. The net result is the same. AOL received the equivalent amount in equipment, so it seems like a perfectly legitimate deal. Maybe it's not clear in the excerpt. If Sun wasn't actually delivering the equipment, that's a different story - but otherwise it sounds like a fair trade. The only thing they do say is that AOL didn't care about the equipment - they just wanted to record the increased revenues. If that's true, then this is incredibly stupid on the part of AOL - and not particularly misleading. The cost of the Sun equipment still would show up as well, so the net result evens out.
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Here's why it worked
Ah,
But you can book ALL the revenue today; and expense the cost of the equipment very, very slowly over many, many years. If your stock options are underwater, and you can surprise Wall Street analysts with a few cents more in "earnings" this quarter, you can then dump your stock on some poor sap in Toledo who thinks AOL might be the "up-and-coming" thing.
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AOL and Revenue
Yes, Slim is on the right track. AOL wanted to be able to book the revenue, regardless of the net profit. In addition, these "round-trip transactions" are not inherently illegal...unless you make these transactions with the intention of boosting the revenue of both companies. Slim is right about the equipment revenue, by the way, because that falls under the Properties and Equipment category...the costs of which can be spread over many years just as its value is depreciated over many years.
I did a report on this just a few months ago. They didn't just engage in these revenue-boosting transactions with Sun, they are believed to have done so with over 30 corporations since 1998, when their 2-years-in-the-making broadband plans with excite@Home burned to the ground.
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Re: AOL and Revenue
You have to remember than in the dot-com boom, nobody cared about profitability. I can remember the president of my company saying that if we did an IPO (which was the plan at the time) the share price would be based on our top line number (revenue) and a multiple. Expenses and the bottom line didn't matter.
In that environment, it makes perfect sense to jack up your revenue even if it costs you more money off the bottom, because nobody cared about that.
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