New York – Stepping up the chase for online advertising dollars, AOL will give away e-mail accounts and software now available only to its paying customers in a strategy shift likely to accelerate the decline in its core Internet access business.
The decision, announced Wednesday by AOL parent Time Warner Inc., removes the few remaining reasons for AOL subscribers to keep paying when they already have high-speed Internet access through a cable or phone company.
“We’ve listened to our customers, and many of them want to keep using these AOL products when they migrate to broadband – but not pay extra for them,” said Jeff Bewkes, Time Warner’s president and chief operating officer.
The move marks the end of an era for a company that grew rapidly in the 1990s by making it easy to connect online, giving millions of Americans their first taste of e-mail, the Web and instant messaging through discs that continually arrived unsolicited in mailboxes.
“This is the final goodbye to the days when AOL was the king of the Internet,” said Jeff Lanctot, general manager of aQuantive Inc.’s Avenue A/Razorfish, an agency that places some ads on AOL sites. “They now know they are the underdog.” AOL hopes that by making services free, it can draw Internet users to its ad-supported Web sites and keep them from defecting to Yahoo Inc., Google Inc. and Microsoft Corp., which have offered free e-mail for years.
Lanctot said AOL could pull off the strategy shift given its “tremendous potential” to tap video and other resources from other Time Warner units as well as a sizable subscriber base – which, while dwindling, still makes AOL the leading Internet access provider.
AOL will still offer dial-up accounts at $26 a month for unlimited use, but the company no longer will aggressively market the service. That’s likely to mean the end of promotional CDs and an unspecified number of job cuts in marketing and customer service.
Free e-mail accounts are available immediately, while some other features, primarily parental controls, won’t become free until early September.
Subscribers who dropped AOL within the past two years will be able to reclaim their old AOL.com e-mail addresses.
The changes were announced as Time Warner reported a profit Wednesday of $1 billion for the second quarter. Its cable TV business grew thanks to more high-speed Internet and digital phone customers, offsetting weakness at AOL, which saw a 2 percent drop in revenue.
AOL accounts for one-fifth of Time Warner’s revenue, and most of that contribution comes from subscription sales. So the bet here is that advertising can rise fast enough to supplant the declines in subscription revenue – a trend possibly already in action. In the second quarter, AOL’s ad sales rose 40 percent, while subscription revenue dropped 11 percent.
“A small percentage of a big something is better than a whole lot of not much,” said Jonathan Gaw, a research manager at IDC.
AOL has about 6.2 million U.S. subscribers who have broadband but pay extra – generally $15 a month – for AOL services, meaning AOL could lose more than $1 billion in annual revenue, on top of what it would have lost anyway from customers dropping dial-up plans.
Advertising, meanwhile, grew last quarter by $129 million from the same period in 2005, or $516 million over a full year if it can sustain the growth rate.
That’s still a gap of about $500 million, although AOL will save an unspecified amount from payroll, network and other costs.
Implementing these changes is expected to cost $250 million to $350 million through 2007, about half for employee severance.
Although millions of subscribers are now likely to drop their paid accounts, AOL has little choice. AOL lost 976,000 U.S.
subscribers in the past quarter alone even with the premium offerings. As of June 30, AOL had 17.7 million subscribers, a 34 percent drop from its peak in September 2002.
AOL’s European units also lost 218,000 subscribers, dropping to 5.6 million. Time Warner said Wednesday it was considering a sale of those units and anticipates a deal this year.
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.
Nonetheless, AOL officials see good opportunities with emerging features like online video. On Friday, AOL is revamping its video portal to give visitors one-stop access to free and for-pay clips from around the Internet, including those at rival sites like YouTube. The company hopes that by creating a user-friendly experience, the market would grow for everyone, including AOL.
Besides e-mail, AOL will give away its proprietary software for accessing the once-premium offerings, as well as safety and security features such as parental controls.
“This is the next logical step for AOL to capitalize further on the explosive rise in broadband usage and online advertising,” Bewkes said. “With its robust and rapidly expanding advertising operation, we expect to put AOL back on a growth path.” Investors have been cautious about Time Warner’s prospects. Even as word of the new strategy circulated in news reports, Time Warner stock prices have been hovering near a 52-week low of $15.70 in recent weeks. The shares rose 40 cents, or 2.5 percent, to $16.65 in morning trading on the New York Stock Exchange.
AOL actually began moving away from its roots as a walled-garden service emphasizing exclusive content in 2004, making most of its news, music videos and other features available for free on its ad-supported sites.
The move was driven by the fact that as more Americans turned elsewhere for high-speed service, they no longer needed AOL for dial-up access and didn’t find the exclusive content enough to justify the price.
Although the company tried to keep some customers paying by giving free e-mail accounts only with less-desirable AIM.com addresses, many subscribers defected to free offerings elsewhere.
AOL also tried to keep its proprietary software a premium offering, but that only made the transition difficult for those who dropped subscriptions but still wanted AOL’s free content. They had to learn new tools, and in doing so, could more easily discover rival offerings.
Jonathan Miller, AOL’s chairman and chief executive, said the strategy shift would help the unit “maintain and deepen our relationship with many more members who are likely to migrate to broadband. Providing them with their familiar AOL software and e-mail for free, over any broadband connection, will be critical to our future success.”
