At an industry conference last month, Armstrong was asked about Khan’s view that AOL would restrict some of its own inventory from the company’s Advertising.com and concentrate on selling premium only as a way to reverse its revenue declines. Armstrong acknowledged that AOL would shift emphasis toward premium pricing, though he was adamant that the company would not abandon Advertising.com, which has served as AOL’s advertising anchor for years.

SEE ALSO: @ UBS Media Week: AOL’s Armstrong: New Ad Platform Rolling Out in ‘10; Ad.com Not Being Abandoned

In his latest report,  Khan estimates that AOL currently generates 40 percent less in ad revenue per unique user than Yahoo, which he attributed to AOL’s decision to sell premium inventory through the now defunct Platform-A nearly three years ago. That action led to pricing and CPM erosion. By modifying its premium placement, AOL should be able to rationalize its pricing, strike new relationships with advertisers and ultimately close the gap between it and Yahoo (NSDQ: YHOO). In the meantime, Khan expects AOL will have to lower the number of ads on its site to enhance the user experience, which could diminish the benefits from higher CPMs.

Khan appears more cautious than optimistic when it comes to AOL’s content strategy, which is now going to rest heavily on using freelancers within its Seed.com platform, as well as its wide array of blogs under MediaGlow. “While the strategy appears to have enough built-in flexibility to allow AOL to mitigate risks, we see substantial
execution risk and don’t expect it to contribute to profitability until 2011.”

AOL is also unlikely to finish fixing its own search offerings until sometime next year. Khan suggests that the Google (NSDQ: GOOG) partnership had a deleterious effect on AOL, as the company opted for lower quality indexing in return for short-term revenue. Since the deal with Google doesn’t completely expire until next December, the trends are likely to continue until AOL is free of that entanglement.