NEW YORK (CNN/Money) -
America Online's decision to do away with "pop-ups" on its Internet service could mark the beginning of the end of the pesky ads, but it won't be the end of intrusive online advertising.
Instead, AOL and other Internet media companies that recently have rethought the idea of pop-ups are likely to focus more on more "rich-media" advertising formats that, while sharing some of the same in-your-face characteristics as pop-ups, are not as objectionable to consumers and are likely to attract more deep-pocketed advertisers.
"The impact of a pop-up is relatively crude and relatively negative," said Jim Nail, a senior analyst at Forrester Research.
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Pop-up ads, which have proliferated over the past two years amid difficult economic times and a sharp decline in overall online advertising spending, cause a new window to open up on the computer's desktop without the user asking for it.
Many Web surfers who use stand-alone browsers such as Microsoft's Internet Explorer or Netscape Navigator already have discovered that they can avoid the ads by either changing the browser's settings or using third-party programs designed specifically to counteract them.
In AOL's case, subscribers routinely have encountered pop-ups when signing on or off of the service, and there was no way to prevent them from popping up.
But on Tuesday, AOL (AOL: Research, Estimates) said it will no longer accept third-party pop-up ads. The company said it will still use pop-ups to notify members about key features of its service, and on a limited basis, to advertise special offers from parent company AOL Time Warner, which also owns CNN/Money.
AOL's announcement that it would no longer carry pop-up advertising came in tandem with the roll out of the newest version of its software, which gives users the ability to block pop-up advertising as well.
The move follows similar announcements recently from Internet service provider Earthlink (ELNK: Research, Estimates) and women's media and Internet company iVillage (IVIL: Research, Estimates).
It also is part of AOL's bid to win new subscribers and hold on to the ones it already has. While it is the world's largest Internet service provider, AOL has faced increased competition from the likes of Microsoft's MSN Internet service, Earthlink and others. Microsoft (MSFT: Research, Estimates) is set to introduce its latest MSN software next week.
Subscriber growth has been among the top concerns of investors and analysts, many of whom have been frustrated with the performance of the AOL unit since the merger of AOL and Time Warner in January 2001. Some fear that it will lose subscribers when those with dial-up connections switch to high-speed connections.
"This is a very clever move, and probably more a public relations move than anything else," said Charlie Buchwalter, vice president of media research at Internet research firm Jupiter Media Metrix.
"We're in the middle of this intense competition, and these vendors are looking at all options to differentiate themselves to find a unique competitive advantage," Buchwalter said.
By eliminating the pop-up ads, AOL gains a PR advantage by shaking its image as one of the biggest purveyors of pop-ups. But at the same time, it is losing very little in terms of revenue and earnings.
By AOL's estimate, the move will reduce its earnings before interest, depreciation, taxes and amortization -- or EBITDA -- by roughly $30 million annually, according to AOL spokesman Nicholas Graham. But it will not have a material impact on the company's 2002 earnings since some of its existing contracts will carry through until next year, he said.
Moving forward, the company expects the loss in earnings to be offset to some extent because it will result in lower costs, according to Graham. "This announcement is a significant member-retention policy, and member retention reduces marketing cost and at the same time does increase EBITDA," he said.
The new policy applies only to America Online. Other free AOL Time Warner Web properties -- including CNN/Money -- will continue to carry pop-up advertising.
Although many Web sites continue to carry pop-ups, their overall contribution to online advertising industry revenue is relatively small. "It's well known that many pop-up ads are close to bargain basement prices now," Buchwalter said.
In general, smaller companies such as online travel outfits, casinos and insurance companies are buying pop-up advertising, with direct marketing ends in mind rather than building strong brand awareness.
"You're not seeing the really big advertisers -- the Ford's, the Procter & Gamble's, the GE's -- because those advertisers are very sensitive to the potential negative impact of the consumer having a bad experience," Buchwalter said.
By abandoning pop-ups, AOL is not risking much in terms of future online advertising prospects.
However, by embracing more rich-media technologies -- such as "over-the-page" ads that dominate the screen briefly but then resolve into a smaller ad unit on the page -- the company may lock on to more lucrative accounts.
Other rich media formats include ads that expand within the Web page on which they are placed when a user moves the mouse cursor over them as well as ads that feature streaming audio and video messages, similar to television commercials.
Forrester's Nail pointed out that the rich media format offers advertisers more creative elements that are more dynamic and interesting and emotional, providing large companies that are more accustomed to and comfortable with television advertising an incentive to make the leap to online.
"I think that's why you're seeing some of the leading fortune 500 companies picking up on them," Nail said.
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