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By Matt Hines, 25 June 2004 11:25

NEWS America Online has announced it will acquire interactive-marketing specialist Advertising.com for $435m.

The internet service provider said the all-cash deal will significantly boost its advertising network. The deal will increase AOL's web-ad-viewing audience to about 140 million internet users, the company said. Advertising.com, which focuses largely on delivery of so-called behaviorally targeted advertising, will also expand AOL's array of technologies for creating and placing online commercials.

Advertising has been a sore spot for AOL, a division of media giant Time Warner, but the company has shown potential for making a comeback. In April, Time Warner reported that AOL's first-quarter advertising revenue fell by 5 per cent, or $12m, compared with the same period last year. However, compared with the previous quarter, the ad business rose 5 per cent, powered mainly by gains in commercial search revenue and fueled by a partnership with Google. In 2003, AOL's advertising revenue declined by a stunning 40 per cent.

Executives at Dulles, Va.-based AOL pointed to the planned acquisition as proof that the company is serious about improving its ad prospects. Jonathan Miller, chief executive at AOL, highlighted recent growth in the online ad industry as evidence that the company can turn the situation around.

Miller said in a statement: "This acquisition is a strategic move that will bolster AOL's advertising business, building on the strides made in the past year."

Advertising.com, which had planned to go public this year, operates a third-party advertising network that it says reaches more than 110 million people each month, and more than 70 per cent of all U.S. web users. The company buys ad inventory from websites, search engines and email publishers and uses its proprietary AdLearn technology to sort and place ads based on its advertisers' goals. The company's revenue increased nearly 80 per cent in 2003 to reach $132m.

One element of the deal that's both attractive for AOL and potentially troublesome is Advertising.com's ability to boost the ISP's prospects for selling behavioral ads. Advertising.com uses visitor data from websites in conjunction with various tracking technologies to profile surfers as they jump from one site to the next. It creates a composite of visitors' demographics, behaviors and interests, but without using identifiable data about specific people. That data is then used to tailor ad campaigns.

While effective, the practice, also known as contextual advertising, has caused concern among privacy advocates, who worry that the strategy opens internet users up to increased scrutiny of their web-surfing habits. In one case, Advertising.com rival DoubleClick nixed plans to track and profile consumers after the Federal Trade Commission and privacy advocates scrutinized the strategy, which called for the merging of personal information from DoubleClick's catalog business with data about web-surfing behavior from the company's ad network.

In addition, the behavioral tracking business runs in contrast to AOL's long-standing agreement with subscribers to respect their anonymity. AOL has long said that it does not use click-stream data to target ads, nor does it deliver individually tailored advertising on its proprietary service. The deal with Advertising.com raises questions that AOL might change its course with consumers.

In a conference call with reporters, executives from AOL and Advertising.com attempted to deflect any concern by citing AOL's established subscriber privacy policies. They also said that Advertising.com's tools do not directly track individuals' web habits.

Scott Ferber, Advertising.com's chief executive, said: "With our technology, it's not necessary to maintain personal usage profiles. We don't think the addition of our business to AOL means anything will change for its subscribers and their privacy."

Ferber also pointed out that AOL plans to maintain Advertising.com as a separate entity from its core ISP business, in the same manner that Yahoo has kept its Overture search unit independent from its portal operations.

Other companies that practice behavioral ad tactics include aQuantive, Revenue Science and Tacoda.

Matt Hines writes for CNET News.com