AOL e-mail accounts, software to be free |
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| BorisVM | 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. 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. (Nasdaq:YHOO - news), Google Inc. and Microsoft Corp., which have offered free e-mail for years. "We're going to stop sending our members to competitors," 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. AOL became the undisputed leader of dial-up Internet access at a time many people still used that method to get online, and the company used its high-flying shares to buy Time Warner at the height of the Internet bubble in 2000. But many of the promises of synergy from that merger evaporated, the company's stock plunged, key AOL executive left under pressure and now Time Warner management is firmly in charge of the company. "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." 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 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 from those customers alone. Executives believe they can find that amount in savings by the end of 2007 by cutting marketing, network and overhead costs. "Acquiring narrowband subscribers has been unprofitable," Bewkes said during a conference call with analysts. "If we did nothing else and just this, this one move alone would increase earnings this year." However, AOL will continue losing dial-up subscribers, perhaps at a faster rate as the company scales back its notoriously aggressive retention efforts and no longer actively markets the service to obtain replacements. "But we have to remember that we're changing the nature of this game," Jonathan Miller, AOL's chairman and chief executive, told The Associated Press. "Before, when someone left us, that was not good for our company. They probably went to one of our competitors." Now they can stay with AOL for free and view its ads. "They were leaving us over price," he said. "They weren't leaving us because they were unhappy." The strategy shift will mean layoffs in marketing and customer service, but AOL would not say how many. Implementing these changes is expected to cost $250 million to $350 million through 2007, about half for employee severance. AOL will still offer dial-up accounts at $26 a month for unlimited use. To compete with lower-cost dial-up services from companies like United Online Inc., AOL is creating a new $10 monthly plan with unlimited access but fewer features than the $26 plan. 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 — about 6 million households, some with multiple e-mail addresses — will be able to reclaim their old AOL.com addresses simply by logging on with their old passwords. The changes were announced Wednesday as Time Warner reported a profit 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, after factoring in cost savings. It's a trend possibly already in action. In the second quarter, AOL's ad sales rose 40 percent, while subscription revenue dropped 11 percent. AOL lost 976,000 U.S. subscribers in the past quarter alone. 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 its European access businesses 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 sees 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. Miller said AOL would distinguish itself from rivals' Web-only offerings with the free, integrated experience. 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 49 cents, or 3.0 percent, to $16.74 in afternoon trading on the New York Stock Exchange. AOL first moved 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. 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. Miller said the strategy shift aligns AOL with the industry "instead of us fighting a trend." |
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