Settlement in the Air at Time Warner

Four years after its turbulent merger with America Online (AOL), Time Warner is finally getting the messed cleaned up. Appeasement is in the air. More importantly, settlement money is in the bank.

Wednesday, the media giant announced it is setting aside $3 billion to settle class action suits with disgruntled shareholders. The huge settlement fund resulted in Time Warner announcing a net second quarter loss of $321 million.

Hours later, the Federal Trade Commission (FTC) announced Advertising.com, now a subsidiary of AOL, settled charges that it violated federal law by offering free security software, but failed to disclose adequately that adware was bundled with the software.

According to the complaint, the adware collected information about consumers, including the URLs of pages they visited. The information was then used to send them unsolicited advertisements.

The FTC complaint charged that in representing SpyBlast as an Internet security program, Advertising.com did not adequately disclose that the anti-spyware program included adware that caused consumers to receive pop-up ads.

"The problem here was not the security software that Advertising.com disseminated with its adware," the FTC stated. "Instead, it was the respondents' practice of downloading software onto users' computers, without adequate notice and consent, that generated repeated pop-up ads as the computer users surfed the Web."

The FTC said the failure to disclose amounted to a deceptive trade practice. The consent order prohibits Advertising.com from making representations about its security or privacy software unless the company "clearly and conspicuously" discloses that adware is also included in the download.

"This company offered SpyBlast, a free security program to protect against hackers," Lydia Parnes, director of the FTC's Bureau of Consumer Protection, said in a statement. "But consumers who downloaded SpyBlast also downloaded a form of software that followed their electronic comings and goings and force-fed them pop-up ads."

Last June, AOL acquired the Baltimore-based Advertising.com for $425 million in cash. It was the largest acquisition by AOL since its merger with Time Warner. Wednesday, Time Warner reported Advertising. com accounted for $60 million in advertising revenues for AOL. Paid search resulted in $30 million in revenue.

Overall in the second quarter, AOL generated total revenues of $2.1 billion with advertising revenues up 45 percent to $320 million.

The bad news for AOL: it lost nearly a million subscribers, almost four percent of its subscriber base as dial-up subscribers over age 15 fled in droves.

The Advertising.com settlement comes after years of embarrassing post-merger snafus that include charges of stock price manipulation, inflated advertising revenues, federal investigations into accounting practices, class action suits and high-level management churn.

In October of 2002, for instance, the newly merged AOL and Time Warner announced it would restate financial results for eight prior quarters. The restatement came after an internal probe of AOL's accounting practices. By the end of the year, the company took a massive $54 billion asset impairment charge when it filed its 2001 annual report. Months later, the company took another $10 billion charge against earnings.

In March of 2003, AOL said it would restate up to $400 million in revenues as the result of an ongoing Securities and Exchange Commission probe over how its AOL unit accounted for advertising deals.

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