TELECOM Digest OnLine - Sorted: AOL Poised to Give More Free Services

AOL Poised to Give More Free Services

Anick Jesdanun (
Mon, 24 Jul 2006 16:37:05 -0500

By ANICK JESDANUN, AP Internet Writer

The company responsible for introducing millions of people to the
Internet is poised to undergo a transformation that would likely
accelerate its decline as a gatekeeper of access to the information

Time Warner Inc.'s board is expected to review on Thursday a proposal
for its AOL LLC online unit to make even more services free, likely
including the vaunted e-mail accounts, in hopes of boosting

The strategy is risky: Millions of customers would likely drop their
paid subscriptions, and AOL would lose hundreds of millions of dollars
a year, perhaps even a billion or more, for the promise of an
advertising payoff some time in the future.

But AOL has little choice. Its subscription business will keep eroding
regardless. Internet advertising, meanwhile, is booming industrywide,
and opportunities abound with ad-supported online video, where AOL is

"It's a risky game they're playing, but it would be riskier not to
play," said David Hallerman, a senior analyst with research company
eMarketer Inc.

AOL got its start in 1985 as a provider of a proprietary online
service, then known as Q-Link. Though it gradually allowed users to
venture off to the public Internet, AOL tried its best to keep users
within its walled gardens filled with exclusive articles, chat rooms
and other features.

Millions of Americans got their first taste of e-mail, the Web and
instant messaging through discs that continually arrived in mailboxes

To many users, AOL WAS the Internet.

But most people connected then via telephone dial-up modems.

As Americans turned to cable and phone companies for high-speed
service, they saw less need to pay AOL simply for the exclusive
content, even as the company offered discounts for those who didn't
need unlimited dial-up access currently $11 off the $26 monthly

After peaking in September 2002 with 26.7 million U.S. customers,
AOL's subscription base plummeted 30 percent, to 18.6 million in

It's still the largest Internet service provider, but AOL faces the
reality that fewer and fewer Americans want dial-up. Roughly
two-thirds of AOL's subscribers are on dial-up plans, while nearly
two-thirds of U.S. Internet users have broadband at home.

Over the past year and a half, AOL has aggressively moved most of its
content news, music videos, chat rooms to free, ad-supported Web
sites. Last year, ad revenues grew 33 percent, even as subscription
revenues declined by 10 percent.

However, the company kept e-mail a premium offering, giving
free accounts only with less-desirable addresses. Many
subscribers hung on, but over time found the free offerings from Yahoo
Inc. , Microsoft Corp. and Google Inc. too sweet to resist.

AOL's proprietary software for checking e-mail, among other things,
became even less of a draw as its rivals made their Web-based tools
richer and easier to use.

"Just about everything AOL offers, you can get free from Google,
Microsoft or somewhere else," said Dave Burstein, editor of the
industry newsletter DSL Prime. "How long are people going to pay for

Free e-mail is particularly important because the service is used
often and regularly. As users check e-mail on an ad-supported Web
page, Hallerman said, they may stumble upon a video or other content,
boosting AOL's ad opportunities.

Keeping users on the paid service merely risks sacrificing those
opportunities forever, said Jeff Lanctot, general manager of aQuantive
Inc.'s Avenue A/Razorfish, an online advertising agency that places
some ads on AOL sites.

"AOL is recognizing that over time, a larger and larger customer segment
will in fact leave the (AOL) nest and like what they find" elsewhere,
Lanctot said.

Two years ago, Bryan Chin, 27, discovered Google's Gmail, a free
e-mail service he found easier to use. He kept his AOL account because
not everyone has his new address yet, but he doesn't believe he'll
ever switch back even if AOL is entirely free. "If it has all the same
features that I am still using AOL for, I don't know why I would still
use AOL," said Chin, an entertainment writer in New York.

The thinking behind AOL's latest strategy proposal is to prevent
further defections and keep users within the AOL family whether they
are a paid subscriber or not.

It's not clear what else might become free. It's possible AOL would
charge separately for parental control and security software, so users
wouldn't need the entire subscription package simply for those

AOL officials would not comment for this story.

Investors, who have seen Time Warner stock prices hovering near its
52-week low, eagerly await details, which Time Warner plans to issue
Aug. 2.

"The market's highly suspect," said Scott Benesch, head of stock
research at the investment firm U.S. Trust. "We're not sure that
you're able to reduce costs at the same rate, if not faster, than
revenues decline in the dial-up (subscription) business."

Subscriptions still account for about 80 percent of AOL's
revenues. The unit is profitable and contributed to 19 percent of Time
Warner's revenues last year. Still, that's down from 24 percent in

Despite his doubts, Benesch acknowledged the latest proposal is
something AOL should have considered even sooner.

If adopted, the new plan likely would result in a curtailment of
subscriber retention efforts, which have been criticized for being too
aggressive. It also could mean fewer television ads encouraging people
to sign up and perhaps an end to those promotional disks.

Layoffs would be likely, on top of the thousands already let go in
recent years, including about 1,300 customer-service personnel given
pink slips in May.

Allen Weiner, a Gartner research analyst, said AOL could benefit from
focusing on one rather than two potentially competing businesses.
Although Yahoo and AOL have bought several startups recently, Weiner
said Yahoo has been quicker and nimbler at integrating their

The number of unique U.S. visitors to AOL sites has remained steady,
while its three chief rivals all saw gains in June, according to
Nielsen/NetRatings. And comScore Media Metrix found that in June,
pages viewed at the main AOL sites by subscribers and free users
dropped 44 percent, while Yahoo increased 23 percent.

AOL officials have said they've been trying to shore up the basic Web
portal offerings, having had a late start, to put the company in a
position to make gains with emerging features like online video.

Although it faces stiff competition from the major portals and
startups like YouTube Inc., AOL can potentially tap the archives of
other Time Warner units, as it already has with old Warner Bros. TV

AOL also can take advantage of Google's recent $1 billion
investment. As part of the deal, Google would help ensure that AOL's
video and other hard-to-index materials find their way into Google's
search results, though it won't give AOL preferential treatment.

"The real value to AOL in the future if it has a value is as
an advertising and marketing platform," said Morris Mark, managing
partner of Mark Asset Management LLC, a Time Warner
shareholder. "Google did not make a 5 percent investment in the
company out of charity."

AP Business Writer Seth Sutel contributed to this report.

Copyright 2006 The Associated Press.

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