AOL, the media company known early on for providing online services and electronic bulletin boards, has the fifth most popular search engine in the world. AOL was once instrumental in bringing people to web portals, chat rooms and instant messaging. Despite being called the greatest innovator that shaped the internet, the company’s foundation has started to crumble in recent years.

Biggest Threats: Online Ads, Social Marketing

AOL is losing to Facebook and Google in online advertising, its network dropping to 2.7 percent from 4.4 percent last year. AOL’s internet portal division reported a loss of $9.7 million in 2011, 98.8 percent less than the same period in 2010.

The AOL Instant Messaging (AIM) system that pioneered web chat also saw a significant drop in visitors (4.9 million), a decrease of nearly 65% compared to previous years. The company had revamped their chat services with a new look, better storage and syncing abilities, collaboration with Facebook and better photo viewing. But the damage is already done–AOL faces tough competition from services like GTalk, Skype, SMS and MMS messages.

The company teamed up with Yahoo and Microsoft as part of the $6 billion AQuantive deal for a new ad strategy. As a part of the deal, the three companies would be selling each other’s Class 2 display inventory, or graphic ads, over their ad networks. The deal is part of AOL’s strategy to regain revenue lost from ad networks and other ad platforms like Facebook and Google.

AOL has also sold  more than 800 patents to Microsoft, out of their 1,100 patents, for $1 billion. The company additionally provided non-exclusive rights for the remaining patents, which include software technologies related to advertising, search, social networking, mapping, streaming, and security. In selling their patent portfolio to Microsoft, AOL has potentially appealed to investors, as a good portion of the acquired money will be returned to shareholders.

The AOL-Time Warner Spilt

AOL and Time Warner, a leader in traditional media, made history when the two companies merged for $106 billion. AOL had reached one hundred million U.S. subscribers, while Time Warner had control of traditional media at that time.

But AOL’s severe shift in strategy as a free portal and unprofitable partnerships resulted in a decline in advertising sales year after year.  The combined company didn’t execute on converged content for mass media, broadband and the internet as expected. The merger failed on certain fronts, falling prey to industry developments like the emergence of higher-bandwidth connections, the growing demand of online content and the rise of the social media networks.

AOL has struggled to get into Internet advertising since subscribers have gradually abandoned its internet service. The partnership finally split in 2009 and AOL already suffered a major setback in terms of subscriber loss.

AOL Portal Strategy

AOL is facing an uphill battle to revamp its portal strategy. The company launched project Devil last year, an ad format to host interactive media and applications such as video, slideshows, maps and polls, in a single platform. Users can click to interact with advertising without leaving the web page. AOL aims to be a leading destination for content on the web through project Devil, supported primarily by advertising revenue.

The large ad format is still trying to gain acceptance from buyers, as sites have been very slow to adopt the new platform and major advertisers have refrained from buying ads through Project Devil.

The company is now concentrating on three main activities: advertising, online publishing, and social networks, still seeking new ground for monetizing its core tools.