Although online advertising is on the upswing and growing this year, AOL's revenue plunged in the third quarter, dragged down by a significant drop in its advertising business.

Compared with 2009's third quarter, revenue fell 26 percent to US$563.5 million. That included a 27 percent decrease in advertising revenue to $292.8 million, as well as a 26 percent drop in subscription revenue.

However, thanks in part to cost-cutting and gains from sales of units and of investments, AOL's net income shot up 132 percent from $74 million in 2009's third quarter to $171.6 million, while earnings per share rose 39 percent from $0.67 to $0.93.

AOL blamed $62.3 million of the revenue shortfall on "initiatives" such as the sale and divestiture of some units and subsidiaries, as well as sales staff reductions.

Still, the company underperformed across its online advertising business, including display and search advertising, even though online advertising spending has bounced back this year after a slight contraction in 2009.

In the US, online ad revenue grew 11.3 percent to $12.1 billion during the first six months of the year, compared with the same period in 2009, the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) said recently.

That is the market's highest revenue total for the first half of a year, putting 2010 on track to reach the market's highest annual level, according to the latest Internet Advertising Revenue Report, from the IAB and PwC.

In addition, AOL rivals Google and Yahoo both posted revenue growth in the third quarter.

AOL has been underperforming in online advertising growth, when compared with market trends, for years. Wednesday's news again puts into question AOL's ability to successfully transition from a business based on dial-up Internet access subscriptions to one based on ad revenue.

After Time Warner spun it off via an IPO in December, AOL became an independent, publicly traded company whose strategy under CEO Tim Armstrong is to jumpstart its online advertising business in large part by becoming a massive provider of original content.