Of course, Microsoft can afford to write these cheques practically ad infinitum, but if your tools are so lacking in perceived utility that you need to bribe people to use them (even if the graft is partially subsidized by affiliate fees), perhaps this is not really the best you could hope for from your marketing team.

You can’t take on Google by trying to buy, or even out-feature, your way into the blank-text-box Search Engine arena. Except for some regional players, like Russia’s Yandex, they’ve won and will not soon be replaced.

What Ballmer, and lots of other people, are missing is that the Search marketplace as we know it is poised for a change. Much of this change emerges from the fact that Google fundamentally owns the global Search Market, but much of the opportunity extant in this space comes from the fact that the technology behind search, and how people will make use of search engines in the future, will be a whole lot different than what you see when you type in www.google.com today.

…. but, there is light at the end of the tunnel for folks who are on the outside looking in at Google’s substantial (and impossible to dislodge) market share:

For most people, web search is a kludge.

Think about how you use Google today. Think about why you type things into that blank text space beckoning to you on your Firefox browser, or why you surf over to Google.com and enter a few snippets of text into that empty area amidst the sea of clutter-free Google whiteness ten, twenty, or maybe many more times per day.

In some cases, you overheard something being discussed in a coffee shop. Or you saw a billboard ad. Something offline motivated you to head to the blank text box and ask it to do your bidding. That is Google’s fundamental market opportunity and has remained largely unchanged since the first search engines began emerging in 1995.

This is, however, just a fraction of the reasons why many of us head to search engines. Often the reasons are as much motivated by inadequate information at one site as by anything else. An example: You’re reading an article from a wire service like Reuters, which rarely include photos, about a car or a submarine or a mountain. You’d like to see what that looks like, so off to Google you go. Or you’re looking at a new LCD on eBay, but the seller hasn’t listed the number and type of inputs that come with it; so off to Google you go to try and find the specifications.

In short, most often we go to Google to search for things because our browsers aren’t good at building pathways between like objects on the web. These types of Searches are what I call context-driven. You shouldn’t need to do this. You shouldn’t need to interrupt your surfing to drop off to a third-party site in order to add flavour to the web objects which have already garnered your interest.

What if you could press a button and instantly be delivered relevant information that is contextual to that which you are/were looking at? What if sites displaying articles from wire services (notable for their sparseness) were able to draw in information – in realtime – which added relevant photos, videos, or related stories?

Some of this is already happening, albeit rather jerkily. One of the leaders which started doing this some time ago was Sphere, which was recently acquired by AOL. It took them some time to draw the same conclusions as I have, and they had a difficult time monetizing these services. But on a great enough scale the same technologies which make relevant content possible also make relevant advertising possible. And while click-thrus will be fewer in quantity they can be greater in quality and therefore infinitely more valuable, thanks to much more accurate targeting.

Being accurate in driving these sorts of searches is hard. Whereas Google relies on its users to sift through its top 30 or so recommendations to find the most relevant information, contextual search engines need to be able to do that with high accuracy on the first few matches with little to no meatware — sorry, Mahalo. Many of the current buzzwordy trends such as the Semantic Web initiatives, Social Search, the shift from RSS to Atom, and API-accessible semantic processing are key enablers to make this easier, but there’s still a considerable amount of R&D necessary to beat Google’s current level of accuracy in this regard.

As a result, you need a long lead to get there, and few of the companies dabbling in the Vertical Search space have raised enough capital or have investors who have committed to developing these opportunities. But in the long run, this will augment Web Search and replace much of the traffic that is today driven by Google’s simple, primitive, empty text box.

What’s clear is that Microsoft’s desperate attempts to lure users to its essentially equivalent service to Google’s can only cost its shareholders. A new paradigm is necessary and, fortunately, the opportunity is ripe for the picking, right in front of us all.

This is a rare opportunity where the solution lies in good, solid R&D and product realization — not in leveraging semi-monopolistic product integration or in brute force advertising spending. Is Microsoft bold enough to understand, and embrace, the fact that Search is shifting? Do they have the product and engineering people to make this happen?

You see, for many of us the online world didn’t begin with the first commercial internet services in 1992 and the first gopher and web sites in 1993.  No… for folks like me it started with computers whose memory was measured in kilobytes, not gigabytes, connecting to other networks and computers at speeds which would make even a Friendster user groan.

What it all meant back then was something very special.  Connecting to a local BBS in a community like Vancouver opened your world (and your mind) to people and things that you’d never have experienced living in the cozy sleepy suburbs.  What you experienced, what you learned, and the people you met were almost invariably not what you expected.  Almost as importantly, the speed at which ideas spread — across multi-line chat systems, especially, were breathtaking.  It wasn’t hard to imagine, when I first discovered email, FIDOnet and USENET, as well as services like QuantumLink (predecessor to AOL) what the implications of the technology would mean when applied to a global scale.

My first real job interview was with Wired magazine in 1993.  It had been hooked up for me by John Perry Barlow, whom I knew only through a number of email exchanges, and whom to this day I have not ever met face-to-face.

On a multiline system called Shoreline BBS, in 1988, I became addicted to a text-only multiplayer online role-playing game called InFiNiTy CoMpLeX, created by a local developer named Dave ‘Zoid’ Kirsch.  It was an amazing, thrilling, engaging experience and it was represented entirely in text.  Later, Dave would credit many of his ideas implemented in Quake as having been conceived and experienced originally within InFiNiTy CoMpLeX.

Such is the power of words.  When they’re portrayed the right way, you can get a job, you can fall in love, you can make friends and enemies, and you can even feel your adrenaline pumping as you flee “Cab the Commie” after blasting him a few times so you can grab some more ammo.

Transmit those words over wires and the opportunity is inherent and obvious.  I think this is why many of the original few souls drawn into the web (and I use the term metaphorically) of the online world came from three distinct backgrounds:

1. Writers, such as John Barlow, prize the value of words.  So their attraction to beaming their own words across wires to others, and reading what came back was instantaneous.  No more publishers, no more editors… just communities.
2. Hackers, such as Dave Kirsch, could visualize ways to represent data and represent newer and ever-weirder challenges for their skills which could have instant and gratifying effects out in the wild.  Programming was no longer a solitary art.
3. Entrepreneurs could see that innate desire in people to connect wih one another, to express themselves, and knew how to capitalize on it.  Adrian Boyko, who ran Shoreline back in the day as a business, got it early.. I’d be curious to hear from him now.

Nowadays, the draw of the internet attracts a more general audience.  Even so I have noticed that most of the truly passionate, dedicated, and successful people who work in our industry have evolved their own interest and understanding of the world of connected information along one of these three distinct paths.

It’s actually pretty rare in my neck of the woods to run into folks who even know what a BBS is (or was), though I’m secretly happy when my mother, who admonished me through most of my teens for chatting with total strangers on a DDIAL, now regales us with tales of her “friends” met on the Scottish Snippets web site.

It’s mainstream now.   But the lessons we still use in designing and building services like Social Networks were learned more than 20 years ago.

+++  ATH

Don’t get me wrong — it’s not that AOL is worthless… but it is clear that it was never worth 75 billion dollars. Steve Case build AOL into a 75 billion dollar parasite and, as the internet bubble ventured well beyond irrationality, he searched for a host onto which to attach that parasite. Now, as the Steve Case love potion wears off, Time Warner realized the disease and is masking the symptoms. Time Warner should have bought AOL for $50 Million. That’s it.

-Ian.

washingtonpost.com Software Aimed at Blocking VeriSign’s Search Program

By Anick Jesdanun AP Internet Writer Tuesday, September 16, 2003; 4:00 PM

NEW YORK — The developer of software that essentially guides Web surfers sought Tuesday to neutralize a controversial service designed to help users who mistype Internet addresses.

The Internet Software Consortium, the nonprofit organization that develops BIND software for Internet domain name directories, is writing an “urgent patch” for Internet service providers and others who want to block customers from a new Site Finder service from VeriSign Inc.

VeriSign, which keeps the master lists of names ending in “.com” and “.net,” launched Site Finder on Monday to steer users to likely alternatives when they type addresses for which no Web site exists.

Though VeriSign gets unspecified revenues from search engine partners whose technology powers Site Finder, company officials described the service as primarily a navigation tool to help lost Internet users.

Critics, however, say the service eliminates user choice, gives a private company too much control over online commerce and could violate longstanding Internet standards.

VeriSign’s service, which affects only “.com” and “.net” names, also overrode similar services offered by several Internet service providers, including America Online, and through Microsoft Corp.’s Internet Explorer browser.

The BIND patch allows AOL and others to restore control by identifying and then ignoring data from Site Finder, said Paul Vixie, president of the Internet Software Consortium.

When the patched software receives such data, it will instead pass along an “address not found” message.

“We’re making this patch available because our customers are screaming for it,” Vixie said.

Though running the software update is optional, Vixie expects many customers will. The consortium was testing the patch Tuesday and planned to release it by Wednesday.

VeriSign officials did not immediately return calls Tuesday. On Monday, its vice president for naming services, Ben Turner, said service providers were free to configure their systems so customers would bypass Site Finder.

BIND, a free product, is used by most domain name servers at service providers, corporations and other networks. Typically, those servers keep temporary copies of the master directories obtained from VeriSign.

VeriSign estimates that people mistype “.com” and “.net” names some 20 million times daily and cites internal studies showing users prefer navigational help over a generic error message.

Earlier this year, a suburban Washington company called Paxfire Inc. tested a similar service for “.biz” and “.us” names, but the U.S. government and a private oversight board asked Paxfire to suspend it after a few weeks pending a review, Paxfire chairman Mark Lewyn said.

A similar feature exists with “.museum” names. People who type in nonexistent addresses are offered an index of museum sites.

Online Music Broadcasters Sue RIAA 36 minutes ago

Add Technology – AP to My Yahoo!

By RON HARRIS, Associated Press Writer

SAN FRANCISCO – An alliance of online music broadcasters sued the recording industry in federal court Wednesday, alleging major record labels have unlawfully inflated webcasting royalty rates to keep independent operators out of the market.

Webcaster Alliance, an organization claiming some 400 members, filed the suit in U.S. District Court for the Northern District of California, claiming the major labels and the Recording Industry Association of America ( news -web sites ) have maintained a monopoly over their music.

The suit alleges the negotiations for arriving at royalty rates to broadcast songs over the Internet violated federal antitrust laws and seeks an injunction that would prevent the major labels from enforcing their intellectual property rights and collecting royalty payments.

The current royalty rate for broadcasting music over the Internet is 7 cents per performance for each listener accounted for, a rate that has kept small webcasters from entering the market, said Ann Gabriel, president of Webcaster Alliance.

Gabriel’s organization would like to see the per performance royalties eliminated. Instead, a flat percentage of commercial webcaster revenues, somewhere between 3 and 5 percent, would be a fair fee to pay, she said.

The RIAA called the suit a “publicity stunt that has no merit.”

“Record companies and artists have worked earnestly and diligently to negotiate a variety of agreements with a host of new types of radio services, including commercial and noncommercial webcasters,” the RIAA said in a statement.

The major labels have struck a variety of agreements for webcasting that go beyond the behemoths of the industry, such as AOL, and deal with smaller commercial and noncommercial operations.

SoundExchange, the organization that collects payments on behalf of the music industry and artists, recently struck licensing agreements with satellite radio stations, college Internet radio stations and background music services that send tunes to retail stores.

___

– Is AOL getting the right to offer Video and other advanced features, or – Is AOL no longer obligated to work toward allowing competitors to use their network? – Or both?

Frankly I have no problem with AOL innovating on top of their service.. I think it’s good for the industry and this limitation has caused them to lose market (such as it is) to other folks like EyeBallChat. But AOL, MSN, Yahoo et al should be mandated to interoperate as it benefits all parties to have a massive, interoperable network of networks.

The FCC shouldn’t have singled out AOL, but unfortunately AOL were the only guys who were merging at the time and this gave the FCC a lever.

-Ian.

—— http://story.news.yahoo.com/news?tmpl=story&cidX2&ncidX2&e=1&u=/nm/ 20030819/wr_nm/tech_aol_dc

Source: FCC to Lift AOL Instant Messaging Condition 2 hours, 7 minutes ago

NEW YORK (Reuters) – U.S. regulators are expected to allow AOL Time Warner Inc. (NYSE: AOL -news ) to offer advanced instant messaging ( news -web sites ) services without opening its systems to rivals, a source familiar with the matter said on Tuesday.

The Federal Communications Commission ( news -web sites )’s expected decision would lift a condition imposed on the 2001 merger of America Online and Time Warner.

AOL Time Warner, operator of the world’s biggest online service, in April asked the FCC ( news -web sites ) to lift the condition that precludes it from offering advanced services such as live streaming video.

FCC officials were not immediately available for comment.

Another source familiar with the decision said the FCC vote is 3-2 in favor of lifting the condition.

AOL Time Warner has said the instant messaging market had become more competitive.

“We think we made a compelling case,” said company spokeswoman Tricia Primrose. “We hope the FCC decision will be out soon and that we get a favorable result.”

Instant messaging is a popular Internet function that allows individuals or groups to have real-time text discussions, but providers have been developing more advanced services to lure more customers.

Possible offerings include live video and audio while chatting in real time.

AOL has already planned to offer the ability to send recorded video clips and have voice conversations through instant messaging in the next version of its online service, AOL 9.0.

The software will not feature live streaming video at its September launch.

When the FCC approved America Online’s purchase of media conglomerate Time Warner in 2001, the agency barred the new company from offering advanced instant messaging services like live streaming video until they work with other services or AOL Time Warner proves the ban is no longer necessary.

-Ian.

—– http://story.news.yahoo.com/news?tmpl=story&cid04&ncids8&e=6&u=/ washpost/20030724/tc_washpost/a32817_2003jul23 AOL Subscribers Down by 846,000 Thu Jul 24,12:23 AM ET

Add Technology – washingtonpost.com to My Yahoo!

By David A. Vise, Washington Post Staff Writer

America Online’s subscriber base plunged by 846,000 in the second quarter, as hundreds of thousands left for cheaper or faster Internet connections and a similar number were dropped because they had been mistakenly counted in the past, AOL Time Warner Inc. disclosed yesterday.

In addition, new disclosures about a federal investigation into improper accounting at Northern Virginia-based America Online Inc. showed that the division’s legal problems are hurting other parts of the AOL Time Warner media empire.

AOL Time Warner said yesterday that the Securities and Exchange Commission ( news -web sites ) would not allow it to spin off a portion of its cable television unit until it resolves a dispute over how to account for hundreds of millions of dollars in questionable revenue from a complex deal with German media firm Bertelsmann AG ( news -web sites ).

AOL Time Warner also said it may restate previously reported profits and sales linked to the Bertelsmann transaction. And the company indicated that it could not determine how long the SEC and Justice Department ( news -web sites ) investigations into its bookkeeping practices will last.

The company said its profit increased to $1.1 billion (23 cents per share) in the second quarter, from $396 million (9 cents) in the second quarter of 2002. Revenue increased about 6 percent, to $10.8 billion. The profit figure included a number of substantial one-time gains from the settlement of a lawsuit with Microsoft Corp. and the sale of various businesses.

Despite solid results in divisions other than America Online, AOL Time Warner shares fell yesterday by $1.14, or 6.8 percent, to $15.71, as analysts and major investors reacted to the continuing uncertainty caused by the SEC investigation, the threat of increasingly costly shareholder lawsuits, the deterioration in America Online’s performance, and disappointment that the strength of AOL Time Warner’s film, publishing and cable television operations did not prompt the company to substantially increase its financial projections.

“Our goal for the remainder of this year is to keep laying the foundation that will enable us to exit 2003 with more momentum than we had when we entered it, with an eye toward achieving, strong sustainable growth next year and beyond,” said Richard D. Parsons, chairman and chief executive of AOL Time Warner.

AOL, the nation’s biggest Internet service provider, has shed a total of 1.2 million subscribers over the past year and now has 25.3 million subscribers in the United States.

The company said the total includes 2.2 million high-speed subscribers, an increase of 300,000 over the past three months. During that period, AOL launched an enhanced high-speed offering and promoted it with an advertising campaign titled, “AOL for Broadband: Welcome to the World Wide Wow.”

In addition to losing dial-up subscribers faster than expected, AOL is predicting that its online advertising revenue will drop about 40 percent in 2003. The decline is occurring even though the total dollars spent on advertising online is growing nationally, a trend that can be seen in the financial results of some of America Online’s competitors, including search engines Yahoo and Google and many specialized Web sites.

AOL Time Warner had sought to persuade SEC investigators that they were mistakenly challenging the accounting for the two-part Bertelsmann deal. But the company said yesterday that the commission has refused to back down.

“The company and its auditors continue to believe the accounting for those transactions is appropriate, but it is possible that the company may learn additional information as a result of its own review, discussions with the SEC and/or the SEC’s ongoing investigation that would lead [AOL Time Warner] to reconsider its views,” the firm disclosed.

The Bertelsmann deal involved AOL’s sale of roughly $400 million in advertising to Bertelsmann in connection with the purchase of Bertelsmann’s stake in AOL Europe.

AOL Time Warner released its second-quarter results prior to the opening of stock trading yesterday morning. Although it cut its projections for America Online, the company beat Wall Street estimates as its cable television, motion picture and publishing businesses thrived.

“Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives,” Parsons said. He added that the company is continuing to reduce its hefty debt through the sale of businesses and the spending of billions of dollars of excess cash generated by operations.

The Warner Brothers and New Line Cinema movie units generated $572 million and $239 million, respectively, at the box office in the United States. “The Matrix Reloaded” led the way among new releases, while “Harry Potter ( news -web sites ) and the Chamber of Secrets” boosted DVD and CD sales.

“On balance,” said Deutsche Bank, “we think this report is good news.”

In a conference call with analysts, Parsons said he was no longer counting on the sale of stock in Time Warner Cable to generate cash for debt reduction this year. Instead, he said, the handling of any cable spinoff will be determined by broader issues, including the best way to help that subsidiary grow.

“The specific timetable for executing an IPO will depend on strategic considerations, not balance sheet imperatives, as well as the status of our SEC investigations,” Parsons said.

Add Technology – AP to My Yahoo!

By MICHAEL LIEDTKE, AP Business Writer

SAN FRANCISCO – Yahoo! Inc (NasdaqNM: YHOO -news ). on Monday snapped up Overture Services Inc. (NasdaqNM: OVER -news ), the pioneer of pay-for-placement online search results, in a $1.6 billion deal that fortifies the Internet powerhouse for a looming showdown with Google and Microsoft.

The cash-and-stock acquisition valued Overture at $24.82 per share — a 15 percent premium over the stock’s closing price last week. The price consists of $312 million in cash and 0.6108 Yahoo shares for each of Overture’s 65.7 million outstanding shares.

The deal’s value will fluctuate with Yahoo’s stock until its expected closing date in the fourth quarter.

Overture’s shares rose $2.54 to close at $24.05 Monday on the Nasdaq Stock Market, where Yahoo’s shares gained 1 cent to close at $32.20.

The acquisition continues a recent flurry of dealmaking in the lucrative business of online searching, a crucial axis on which much of the Internet’s utility depends.

By buying Pasadena, Calif.-based Overture, Yahoo gains control of one of its most important business partners and strikes a blow against Google and Microsoft.

A fierce rival of Google, which offers ad-based results distinct from its popularity-based search rankings, Overture now threatens to become more formidable by tapping into Yahoo’s greater resources, which included $1.1 billion in cash as of June 30.

Privately held Google, which provides some search results to Yahoo, declined to comment on Monday’s deal. Microsoft, whose MSN service, like Yahoo, has been collecting steady profits from Overture, was circumspect.

Lisa Gurry, MSN’s group product manager, said the software giant will make its next move after examining how Yahoo’s deal might affect its relationship with Overture.

Although Yahoo executives said they hope to maintain Overture’s existing alliances with partners such as MSN, it seems improbable that the rivals will want to subsidize each other, said Danny Sullivan, editor of the industry newsletter Search Engine Watch.

“This hurts MSN because Overture had been one of its best buddies,” Sullivan said.

MSN has been pouring more resources into online searching in an effort to become less reliant on services provided by outsiders. Besides relying on Overture for some of its search results, MSN also draws upon Inktomi, a search engine service that Yahoo acquired earlier this year for $279.5 million.

During the past 18 months, Overture has become increasingly valuable to Yahoo, prompting predictions that the two companies eventually would unite.

Overture has played a pivotal role in Yahoo’s recent financial revival, accounting for roughly 20 percent of Yahoo’s revenue of $604 million during the first half of this year.

Conceived by dot-com entrepreneur Bill Gross in 1997, Overture developed a search engine that sorts its results based on how much advertisers are willing to pay to be ranked under specific words.

Overture’s commercial database feeds search engines at popular Web sites such as Yahoo and MSN, which display the advertising links along with results generated by objective, algorithmic formulas.

Ridiculed just a few years ago, the so-called “pay-for-performance” concept has turned into an online gold mine. Pay-for-performance search is expected to generate $2 billion in revenue this year and U.S. Bancorp Piper Jaffray expects the lucrative niche will reach $5 billion in 2006.

Overture has cashed in on pay-for-perfmorance’s popularity, attracting 88,000 advertisers while generating earnings of $114 million since it first became profitable in the summer of 2001.

But the company’s success attracted more competition, most notably from Mountain View, Calif.-based Google, which has lured away pivotal partners such as AOL and EarthLink and spurred pricing concessions that have lowered Overture’s profit margins.

Although it followed in Overture’s footsteps, Google now has a slight edge over its rival in the United States. Domestically, Google’s network generated about 54 percent of all paid search results compared to 45 percent for Overture, according to market research compiled by comScore qSearch.

The competitive pressures prompted Overture’s management to lower its profit projections earlier this year and contributed to a downturn in the company’s stock, opening the door for Yahoo’s offer.

The deal supplements Yahoo’s recent acquisition of Inktomi with two other search engine services, AltaVista and Alltheweb.com, that Overture bought earlier this year for a total of $207 million.

Putting all those search engine tools under one roof is likely to create overlap, Sullivan said.

Yahoo executives believe all the services will help further its quest to overtake Google as the Web’s most popular search engine.

“We now own all the crucial elements of an end-to-end search offering,” Yahoo CEO Terry Semel said during an analyst call Monday.

Google continues to provide some of Yahoo’s search results. Semel declined to comment how the Overture acquisition will affect Yahoo’s relationship with Google. “I didn’t lay awake last night wondering about that,” Semel said in an interview Monday.

As a counter-punch to Yahoo’s moves, Microsoft seems more likely to acquire a search engine company, Sullivan said.

Potential candidates include Ask Jeeves Inc., FindWhat.com Inc. and, perhaps even Google.

MSN’s Gurry declined to comment on the company’s possible interest in Google.

> From: Gregory Alan Bolcer
> Date: Sat May 31, 2003 3:57:02 PM US/Pacific
> To: FoRK
> Subject: Re: waste testbed
> Reply-To: gbolcer [at] endeavors [dot] com
>
> Wow. Deja Vu all over again. Those dang
> Nullsofter’s causing the exact same problems they
> did 3 years ago.
>
> Greg
>
> Elias Sinderson wrote:
>>
>> Part 1.1 Type: Plain Text (text/plain)
>> Encoding: 7bit
>>
>> AOL pulls Nullsoft file-sharing software
>> By Jim Hu
>> > e-sharing%20software>
>>
>> Staff Writer, CNET News.com
>> May 30, 2003, 2:06 PM PT
>> http://news.com.com/2100-1032-1011585.html
>> <3189 https://ianbell.com/2003/04/16/serpicos-aol-say-hi-to-mom-from-jail/ Wed, 16 Apr 2003 21:54:54 +0000 https://ianbell.com/2003/04/16/serpicos-aol-say-hi-to-mom-from-jail/ …yeah right. These guys will never go to jail.

But AOL will go down in history as a Ponzi scheme that makes 80s Junk Bonds look like chicken feed. Actually, I found a good backgrounder on Ponzi schemes here: http://www.mark-knutson.com/thescheme.html

-Ian.

——- http://www.fortune.com/fortune/investing/articles/0,15114,443065,00.html

AOL TIME WARNER Why AOL’s Accounting Problems Keep Popping Up The online giant created ad ‘revenues’ out of thin air. Now, it’s got scandals! FORTUNE Monday, April 14, 2003 By Carol J. Loomis

When there’s bad corporate news to be disclosed, the wise say, “Get it out and get it over with.” But that message hasn’t visibly permeated AOL Time Warner (parent of FORTUNE’s publisher) when it comes to accounting problems. Since last July, when the Washington Post did a biting two-part article about unsavory behavior at AOL, the company’s online division, the news hasn’t stopped. First the SEC moved in to investigate, and then came the Justice Department. Next, in August, AOL Time Warner’s CEO, Richard Parsons, certified the company’s financial statements–except for $49 million in AOL “revenues” that the company said it had just discovered maybe shouldn’t have been claimed as such. By October, when a “review” of that matter and others had been completed, the $49 million of nonrevenues had ballooned to $190 million (for unenumerated sins, most attributed to AOL), which the company said it would expunge by restating eight quarters of its 2000-02 financial statements. In the restatements, of course, profits vanished along with the revenues.

Then, just as March ended, came the news that the company and the SEC were arguing over yet an additional $400 million of revenues that might not deserve the name. In short, the SEC is suggesting that the $190 million confession didn’t exhaust the bad stuff. Its investigation continues, as does the Justice Department’s. So AOL Time Warner has acknowledged that further restatements might become necessary.

There’s a stark explanation for this river of news, and it’s kin to an old saying: “To a man with a hammer, everything looks like a nail.” At the AOL division, the locus of the accounting troubles, the hammer was an insatiable desire to show growth in revenues–very particularly, in what AOL called “advertising and commerce”–and to book the Ebitda (earnings before interest, taxes, depreciation, and amortization) that tagged along. So to AOL every business deal, including the unlikeliest of candidates, looked like a way to get these revenues. AOL won an arbitration award that it negotiated into an advertising contract. A raft of dot-coms that AOL invested in round-tripped their money–and at least once, in the case of Homestore.com, apparently triangulated it–into advertising. Investing in a dot-com called PurchasePro, AOL bought warrants for $9 million, then marked up the investment to $27 million and booked the difference as revenues.

And in the latest revelation, AOL’s purchase of Bertelsmann’s half-interest in AOL Europe magically produced that $400 million in ad revenues that the SEC and AOL Time Warner are fighting over. Magically and invisibly, we might add. Outsiders never knew there was $400 million of advertising tied to the Bertelsmann deal until AOL Time Warner made that fact clear at the end of March.

So, yes, in Virginia, at AOL, there was an obsession to get advertising in the door. Consequently nobody there appears to have paid much attention to whether the business deals at issue were really producing ad “revenues” by any acceptable definition–or perhaps the insiders didn’t think outsiders would ever learn the details. Well, the outside world has now caught on, and so have a lot of plaintiffs lawyers. Besides tussling with Washington, AOL Time Warner is today the defendant in at least 40 shareholder suits, many of which sprang from the accounting legerdemain.

It is important to recognize that at AOL Time Warner, whose revenues last year were $42 billion, neither $190 million nor $400 million is a major figure. But in certain ways these tainted amounts (leaving aside other problems the regulators may still unearth) counted for a lot. That’s partly true because incremental advertising revenues at AOL don’t tend to be heavily burdened with costs. So these revenues generally cascade into profits. Specifically, AOL Time Warner has said that the $190 million in bogus revenues ($22 million of which went to company divisions other than AOL) produced $97 million of Ebitda and $46 million in net income. That net translated–until the restatements whisked it away–into a neat profit-to-revenues margin of 24%. As for the $400 million, what it produced in Ebitda and net income can’t be said, because the company has not disclosed that information.

The other reason that these incremental revenues mattered is that they helped AOL paint a deceptive picture of exactly what was happening in its advertising and commerce line of business. As 2000 began, bringing with it the amazing news that AOL and Time Warner were going to merge, this segment of operations was the bright hope for AOL. Its online subscription business, true, was significantly larger and still growing. It produced revenues in 2000 of $4.777 billion, against a reported, though now tainted, figure of $2.347 billion for advertising and commerce. But everyone expected that growth in subscriptions would eventually flatten out (which, in 2002, it did), and here was this advertising and commerce business whooshing up like crazy–roughly doubling every year, in fact.

We all know now that the Internet bubble burst in March 2000, but at the time that fact was not obvious. And at AOL, for sure, the announced ambitions for advertising and commerce were then still extraordinary. At a joint meeting of the AOL and Time Warner boards in July 2000, Robert Pittman, the highly confident chief operating officer of AOL (who is now gone from the company), said that by the year 2005, he expected this line of business to produce $7 billion in revenues!

In your dreams–including the ones that began exploding in 2001. That year’s picture was helped out by $88 million in revenues that AOL Time Warner now says were “inappropriately recognized” and by $122 million in contested Bertelsmann revenues. Even so, the advertising and commerce line grew that year only to $2.673 billion, a tepid rise of 14%. And in 2002 the trend rolled over abjectly–like a worn-out dog–and revenues fell by a huge 40%, to $1.606 billion. The amount would have been significantly lower still had it not included $6 million of inappropriately booked revenues and $274 million from the Bertelsmann deal. In any case, the punishing experience of 2002 proved the idiocy and uselessness of all the contortions that AOL had put itself through in its advertising business: It was trying to get from a place it never was to a place it never could be.

During all the accounting events that led up to the $190 million restatement, including those that took place after the consummation of the merger in early 2001, AOL people were in charge of what was happening at AOL. Steve Case was the boss; Bob Pittman was originally No. 2 and later was the AOL Time Warner executive who had responsibility for AOL; Michael Kelly was the hard-charging chief financial officer (first of AOL, then for a time of AOL Time Warner); and a man named David Colburn –fired last August–ran the business affairs department that negotiated many of the smelly deals. In the meantime, the old Time Warner executives–Gerald Levin, who became CEO of AOL Time Warner, and Richard Parsons, now CEO–were in New York City, sort of listening in. What they knew about the happenings at AOL is unclear.

But the $400 million deal done with Bertelsmann, the big German media company, is different from the $190 million in that it spanned a regime change, in which the AOL forces lost power and Time Warner gained it. So people like Levin and Parsons were on the Bertelsmann case at certain key moments. The deal’s strangeness therefore deserves special attention.

When AOL and Time Warner announced in January 2000 that they would merge, Bertelsmann and AOL had a skein of connections. Steve Case and Bertelsmann’s CEO, Thomas Middelhoff, were good friends; Middelhoff was on AOL’s board; Bertelsmann was a significant holder of AOL stock (though it had also been a significant seller in the late ’90s, reaping glorious profits at per-share prices ranging up to around $95); and the two companies jointly owned AOL Europe. After the merger announcement some of these things had to go, for the simple reason that Bertelsmann and Time Warner were competitive media giants and couldn’t be in bed together.

So Middelhoff resigned from AOL’s board. And then in March 2000 the two companies said they had agreed on a complex put-and-call deal by which AOL would potentially buy out Bertelsmann’s 49.5% interest in AOL Europe. This business was then, and is now, a losing operation. But the price negotiated by the CFO of AOL, Kelly, was a product of Internet frenzy and was to be a monster $6.75 billion (or under certain circumstances even more). One major investor in AOL Time Warner recently called that deal the “killer” for the merger, though it is probably wishful thinking on his part to believe that this one transaction could have made the difference in a coupling so fated to fail.

If a minimum price of $6.75 billion was set, the exact timing and terms were not. Most important, AOL Time Warner had the right to pay in cash, stock, or a combination. There was also a delay factor built into the deal, specifying that payment would not begin, at the earliest, until 2002.

By March 2001, though, with the merger completed, AOL’s Kelly and Bertelsmann were down to hard negotiations about just what kind of payment–cash or stock–would be made. Looking at AOL’s tumbling shares, then fluctuating around $40, Bertelsmann naturally wanted cash. You might think that AOL would want the opposite, since it was loaded with more than $20 billion in debt and sure to need more if it paid cash. But what AOL really cared about, above all things, was a quid pro quo. AOL offered cash if “in exchange” (words used in AOL’s recent disclosures about the deal) Bertelsmann would sign up for ads.

And in the end a kind of compromise was reached: AOL Time Warner would pay at least $2.45 billion in cash (with the form of payment for the remainder of the $6.75 billion to be settled later), and Bertelsmann would buy $125 million in ads. When the $2.45 billion arrangement was announced in AOL Time Warner’s first-quarter 10-Q filing with the SEC, nothing was said about a $125 million advertising deal tied to it.

Bertelsmann’s ads, for such things as music products and book clubs, began to run on AOL, in most cases dwarfing the amounts being spent in those categories by other advertisers. But one former Bertelsmann executive remembers behind-the-scenes dissension at his company about the deal. He, for one, saw no use in advertising on AOL but was forced to go out and do it. Fortunately for his bottom line, he says, headquarters absorbed the cost of the advertising on its books rather than allocating it down to the operating divisions.

By the end of 2001, most of Bertelsmann’s $125 million had been spent, and AOL and Bertelsmann were back to negotiating the next tranche of payment. Mike Kelly (who declined to talk to us) had at that point been moved out of the CFO’s job, becoming the operating head of AOL. But the word at AOL Time Warner’s offices in New York City is that he continued to be the negotiator on the Bertelsmann deal. And certainly the style of what developed looked familiar: This time AOL agreed that in 2002 it would pay the entire $6.75 billion in cash, and in exchange, Bertelsmann would buy $275 million more of advertising on AOL (almost all of which ran in 2002).

So, to sum up: To get cash, Bertelsmann was willing, in effect, to cut $400 million from the purchase price (and maybe more; who knows?). AOL could have accepted that cut straight out, reducing the price it had to pay to $6.35 billion–and thereby netting a crisp, clean saving of $400 million. Instead, it opted to get that much in advertising, which though it may not have carried much in costs, certainly carried some. So AOL Time Warner did not, in that arrangement, garner a full $400 million. It’s totally weird–unless you know that the only reason for doing things that way was to capture advertising and commerce revenues.

We come now to the role of Time Warner executives in all this. By late 2001 there had been a regime change, in which the Time Warner crew had taken power from AOL. Jerry Levin was retiring in May 2002 but had designated Dick Parsons, not Bob Pittman, as his successor. A new CFO, Wayne Pace, formerly at Turner Broadcasting, had been installed in November 2001 and had been widely accepted as an upright, tell-it-like-is executive. And this new team was stepping up to the job of reporting the company’s results.

So in the spring comes 10-K time, in which the company must file its annual report with the SEC. The Bertelsmann deal got a lot of ink in that 10-K: The company, the filing said, would pay $6.75 billion in 2002 and was borrowing to raise the cash needed. But was there any mention that the $6.75 billion was offset by a $400 million advertising deal? Absolutely not.

FORTUNE sought to ask AOL Time Warner management about this omission, as well as many other points having to do with the accounting problems. But management, pleading the Washington investigations, wouldn’t talk on the record, and this writer wouldn’t talk off the record. Company executives merely repeated what they had said before: “As we stated in our Form 10-K, the company and its auditors continue to believe that the Bertelsmann transactions have been accounted for correctly. But, as we disclosed, we are engaged in ongoing discussions with the SEC staff to consider their views and any additional information they may have as part of the company’s continuing efforts to cooperate with the SEC’s investigation.”

Because AOL Time Warner wouldn’t tell us why it had omitted the $400 million advertising deals from its SEC filings, we can only speculate about the reasons. Maybe management and its auditor, Ernst & Young, honestly thought there was no need to mention the advertising. Then again, maybe they recalled what had happened in the first-quarter 10-Q–no reference to the first advertising agreement–and thought it would be controversially inconsistent to suddenly be making admissions about the Bertelsmann ad deals.

Although investors might think AOL Time Warner had a duty to disclose the advertising deals, the SEC’s declared problem with the Bertelsmann matter is not about disclosure but rather about the accounting for the advertising. As AOL Time Warner has described things, the SEC has a “preliminary view” that at least some portion of the $400 million should not have become revenues but instead should have been recorded as a reduction in the price that the company paid Bertelsmann.

Neither AOL Time Warner nor Ernst & Young agree with this argument. How could they, given that they did not include the Bertelsmann deal in the bad stuff that they acknowledged in the $190 million confession? Indeed, FORTUNE has learned that when AOL Time Warner signed off on the $190 million in October, it did not know the SEC had any problems about Bertelsmann. The SEC, for that matter, didn’t then know it either, because only later did it become educated about the Bertelsmann affair.

AOL Time Warner and Ernst & Young are not only defending the accounting but have also explained to the SEC in writing why it was sound. FORTUNE asked to see a copy of the explanation but was refused. We then directly asked Ernst & Young to brief us about the accounting issues, and they refused that request as well, saying they could not “breach the confidentiality of client matters.”

So we turned to some outside accounting experts. One, Jack Ciesielski, publishes the highly regarded Analyst’s Accounting Observer and is also a member of the Financial Accounting Standards Board’s emerging-issues task force. To Ciesielski, there’s no gray area to this issue at all. “I agree with the SEC,” he says. “The timing of the advertising contracts indicates they were part of the deal.” So what he sees is a “rebate” that should never have been accounted for as revenues but rather as an offset to the cost of the deal.

A sharper opinion still comes from Walter Schuetze, a former KPMG partner who also served as a board member of FASB, chief accountant of the SEC, and chief accountant of its enforcement division. “I suspect,” he says, “that the SEC staff is saying to AOL that only the fair value of the advertising that Bertelsmann bought can be booked as revenue. But that is such a diaphanous number that I wouldn’t put much stock in it. I think the entire $400 million should be credited to the purchase price.”

He refers to Bertelsmann’s buy of advertising as a “forced purchase,” similar to many others that AOL had cranked onto its books. As for Ernst & Young, Schuetze is not respectful. He says that on AOL, it has been the “most pliable auditor” he’s ever seen: “AOL’s accounting has been rubbish,” he says, “and Ernst & Young agreed to rubbish accounting.”

It is hard to follow an act like that, so we won’t try.