AOL May Speed Shift Away From Subscribers

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By Sara Kehaulani Goo
Washington Post Staff Writer
Friday, July 7, 2006

AOL is considering a rapid acceleration to a new business strategy, one in which it gives away premium services that its broadband customers pay for -- such as e-mail addresses and parental controls -- and moves away from its dependence on member subscriptions, according to people familiar with the internal discussions.

Instead, the company would gamble on increasing ad revenue and a portal-type presence on the Web that would make the Dulles-based Internet pioneer look more like powerhouses Google Inc. and Yahoo Inc. It means that the company initially could be giving up $1.8 billion in revenue from subscription fees that would probably be recouped through advertising revenue over time, one analyst said.

At the same time, AOL could also sacrifice hundreds or thousands of jobs related to marketing and subscriber retention -- most of which are outside the company's headquarters -- and bring an end to the familiar free CDs that offer trial subscriptions to its dial-up service.

AOL declined to comment on its plans yesterday. But a person familiar with the internal discussions, who spoke on the condition of anonymity because the plan is not final, said the company is trying to determine which content offered to only subscribers should be available to everyone. The company would not abandon its dial-up members but would halt efforts to recruit new customers.

Bear Stearns analyst Spencer Wang wrote in a memo released yesterday that he expects AOL to begin the transition this year, noting that the company has already taken steps to pull back from advertising its dial-up service. Wang also estimated that AOL could shed more than 80 percent of the company's call-center staff.

Some analysts expressed shock at the idea of AOL giving up subscription revenue to make the transition and characterized the plan as risky. Many, though, said the drastic move is necessary for AOL to survive.

"It's a case where AOL has to make a move to stay competitive," said Rob Enderle, a Silicon Valley technology consultant. "While they are declining slowly, they are still declining. It wasn't a matter of if but when they would be dead."

AOL built its business by introducing people to the Internet at a time when dial-up was the norm. In recent years, high-speed DSL or cable service has replaced the slower service, and AOL's subscriber base has steadily shrunk.

The firm reported 18.6 million subscribers in the United States on March 30, a decline from 21.7 million a year ago. For broadband customers who get their Internet service from a phone or cable company, AOL offers subscriptions that include premium features such as parental controls and security programs, for monthly fees of $15 to $26.

"They can't be an Internet service provider in a broadband world," said James C. Goss, a media and entertainment analyst at Barrington Research Associates Inc. in Chicago. "With three-quarters of Internet users on broadband, we're almost at a broadband world."

A year ago, AOL began offering many of its services for free on AOL.com, but it still relies on its subscriber base to attract advertisers. In May, AOL announced plans to cut 1,300 jobs at call centers in Arizona and Florida to reflect the declining subscriber numbers.

If AOL moves ahead with the plan, it faces another challenge: overcoming its image as an old player on the Internet, compared with newer, hotter properties such as Google. Yankee Group Research Inc. analyst Matthew Del Percio said that many people perceive AOL as "your mom and dad's Internet provider" and that a strategy shift may help to start improving that image.

"AOL really needs something to send a jolt down its spine," he said.


© 2006 The Washington Post Company

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