For years, America Online Inc. grew steadily into the nation's biggest Internet service by treating subscribers to exclusive content and services it hoped would produce the sort of captive audience that advertisers crave. But now, with users departing for faster or cheaper online competitors, company officials are rethinking their "walled garden" strategy.
To ramp up ad revenue, America Online is hoping to attract millions of Internet users who do not subscribe to the service to a shopping site it recently launched, and to a soon-to-be beefed-up AOL.com Web site, company officials said. Dulles-based AOL, which profits mostly through monthly subscriber fees, would seek to boost profits by selling ads on the shopping site and on AOL.com.
The most visible part of AOL's strategy involves the recent launch of in-store.com, an online shopping site that does not have America Online's name on it anywhere. The company hopes to generate advertising and e-commerce revenue from In-store.com in part through a new, proprietary search service called "pinpoint," which helps consumers find products online.
Behind the scenes, there are emerging plans to transform the AOL.com Web site in the months ahead by making it more appealing to advertisers, whose total online spending is rising at a double-digit rate. By providing some free content from Time Warner's stable of magazines, and perhaps a dose of streaming music and video on AOL.com, America Online hopes to build a larger audience for that Web portal and then profit by selling ads next year.
The risk: By giving away features on AOL.com, America Online could accelerate the departure of subscribers who think they are not getting enough value out of the $23.90 they pay in monthly fees .
The strategy shift come as AOL -- the nation's biggest Internet service with more than 22 million subscribers -- continues to lose hundreds of thousands of users each quarter who reach the Web over dial-up telephone lines, while adding broadband subscribers who access America Online through high-speed cable and telephone connections.
David Card, an analyst with Jupiter Research, said AOL's strategy of reaching out to new users is wise but long overdue.
"AOL, welcome to the world," Card quipped. "I'm not collecting subscription fees and creating a walled garden around you. I make money with advertising served up by Google or Advertising.com or Bizrate. This is what MSN or Yahoo try to do."
Card said the new strategy is critical if the AOL business is going to grow in the long-term since the subscriber drain shows no signs of abating. This week, Time Warner vice chairman Don Logan, who oversees the America Online division, predicted it would expand in the near term but expressed uncertainty about its longer-term prospects.
"We have the opportunity to deliver sustainable growth over the next several years," Logan said. "If we don't do it, it's a failure of execution on our part."
Card said the strategy shift reflects frustration that AOL is not getting enough fresh revenue from ads at a time when total online ad spending is robust.
While going after ad dollars, AOL is also stepping up efforts to hold onto its subscribers and maybe even sign up some new ones. The company kicked off a newspaper ad campaign yesterday in The Washington Post, the New York Times and the Wall Street Journal, where AOL ran two-page ads. A television campaign is to debut next week.
Once considered synonymous with the Internet, the AOL brand, for years touted as easy-to-use, began losing its edge as people found that they could navigate the Web on their own. The ads are an attempt to distinguish it from other services.
"First and foremost, AOL will always help our members feel safer and more secure," the newspaper ads said. "The threats from computer viruses and worms are real, but so it our commitment to stop them. If we can make people feel safe online -- and we can -- we can remove one major element of their anxiety."
While moving forward with plans to garner ad revenue, AOL also is trying to keep its subscribers happy. The first changes on AOL.com will be available only to subscribers, who will be able to access an updated Web site from the office or while traveling to check their e-mail and use other services. The idea is to get them to come to the site more often, pushing up what are known as page views, a key for advertisers.
"We have around 16 to 18 million unique visitors per month to AOL.com," said vice president David Liu. "What we want to do is be more relevant to all of our membership base and do that first and foremost. Today, 90 percent come to check e-mail. We want to increase page views by improving the e-mail experience. If we can increase page views, we would open more advertising opportunities."
AOL executives said they are promoting the shopping site first to existing subscribers, adding that they view In-store.com merely as a first entry into the competitive world of Internet retailing and that they anticipate adding other, product-specific shopping sites later.