America Online Inc. is projecting for the first time that its base of dial-up subscribers will decline on an annual basis, a drop that Wall Street analysts predict will be in the range of 500,000 to 1 million customers.
AOL reported 26.5 million domestic subscribers Dec. 31, a decline of about 200,000 during the fourth quarter of last year. In a filing with the Securities and Exchange Commission, Dulles-based AOL projected a further drop in dial-up subscribers in 2003.
"With the narrow-band market maturing, we are focused on increasing the profitability of narrow-band subscribers and building awareness and membership of our broadband service," America Online spokesman Jim Whitney said yesterday.
AOL said its dial-up business will shrink this year for a variety of reasons, including a decline in response to direct marketing, an increase in subscriber terminations and cancellations, and heightened competition from providers of high-speed Internet access and low-cost dial-up rivals. The company also warned that profit margins will be squeezed as AOL users sign up for high-speed Internet access with cable and telephone providers and retain their America Online subscriptions, but at a lower price.
Last week, America Online launched a $35 million marketing campaign to persuade existing customers to keep the online service as they sign up for high-speed connections elsewhere. (Most AOL subscribers pay $23.90 per month.) AOL executives said in December that the unit's overall subscriber base would grow as the company added large numbers of broadband customers, but Wall Street remains skeptical that consumers will pay for AOL on top of a high-speed connection fee that typically goes for about $40 a month.
"There is tremendous consumer resistance to paying extra," said David Card, an analyst with Jupiter Research, adding that AOL for Broadband "doesn't knock your socks off."
"It would be easier," Card said, "if there wasn't so much good free stuff online. It is a huge challenge."
Goldman Sachs & Co. predicts that the number of AOL subscribers will fall by 550,000 this year. But analysts for the company said the falloff is not the only problem facing America Online and parent AOL Time Warner Inc. Goldman cited AOL Time Warner's failure to alert investors sooner that the SEC was pressing the corporation to reduce a portion of $400 million in questionable ad revenue from media giant Bertelsmann AG.
"We are disappointed by the decision to not disclose such a large, discrete and identifiable contribution to revenue for such a highly scrutinized division such as AOL," Goldman said in a report. "The fact that this considerable, discrete and seemingly one-time contribution to revenue occurred and was not disclosed after setting the record straight in 2002 will likely result in increased investor concerns."
AOL Time Warner maintains that its accounting for the Bertelsmann transaction was appropriate and disagrees with the SEC's interpretation. In 2002, AOL Time Warner restated $190 million in ad revenue at America Online after reviewing questionable deals. The company has said it is seeking to cooperate with the SEC and an ongoing criminal probe.
"The SEC staff also informed the Company that it is continuing to investigate a range of other transactions principally involving the America Online unit," AOL Time Warner disclosed in a filing to investors. "The Company may not currently have access to all relevant information that may come to light in these investigations."
Jordan Rohan, an analyst with SoundView Technology Group, said AOL faces lingering uncertainty over the SEC probe, including any Bertelsmann restatement. He also projects that America Online will lose more than 1 million subscribers this year.
"Until the company can prove that it has a killer application for broadband, most people are going to be influenced by the cost savings of moving away from AOL," he said. "I think the broadband offering will improve this summer, but I still don't know what killer application is going to reside within that offering that will get someone to pay an extra $10 to $15 a month."