America Online Inc. yesterday began offering high-speed Internet access with AOL e-mail and content in the Washington area and Chicago, a move that company officials hope will stem the loss of dial-up users as the service is rolled out nationally later this year.
The Dulles-based firm has lost more than 5 million subscribers to faster and cheaper Internet services in recent years. The new $29.95 per month service, dubbed AOL High Speed, gives the company something fresh to offer fleeing dial-up users. AOL officials said they plan a series of cable television ads and online marketing to encourage the firm's dial-up subscribers, who pay $23.90 per month, to switch to AOL High Speed.
"This makes a lot of sense," said Charlene Li, an analyst with Forrester Research. "If you have any desire to stay with AOL, you are going to look at this deal very seriously. It sounds smart."
Despite losing about 2.3 million subscribers in the past year alone, AOL, a division of Time Warner Inc., remains the nation's biggest Internet service with 21.7 million subscribers. The company's ad revenue has begun picking up again after a few years of decline.
The new high-speed product is the first time AOL has offered a simple, competitively priced way for its subscribers to get faster online access and keep AOL services and content, too.
In the Washington area, AOL High Speed is priced in the same range as standard high-speed Internet services sold by Comcast Corp. and Verizon Communications Inc., which dominate the market. But in Chicago and other cities yesterday, rival service provider SBC Communications Inc. began aggressively cutting the price of its Yahoo high-speed offering to just $14.95 a month, bringing prices for fast Internet connections below the cost of AOL dial-up for the first time.
Both the AOL and SBC high-speed offerings operate over the same lines used by home telephone service. Cable television companies typically charge more for their services, which they say are even faster.
The five-week test in Washington and Chicago by AOL reflects a fundamental shift in the online business environment and demonstrates how the company is trying to adapt. Several years ago, AOL made its name by offering a one-size-fits-all dial-up service. But the world changed, and computer users left for cheaper dial-up or faster connections provided by others.
Now, with its $9.95 Netscape dial-up service, its $29.95 AOL High Speed and its traditional dial-up offering, AOL has a broad range of products at different price points, a move analysts said is essential given the segmentation in the marketplace.
AOL is also looking to capitalize on the boom in Internet advertising by beefing up its free AOL.com Web site. It hopes to attract millions of computer users to the site with music, games, news and other content, as well as by giving away free AIM.com e-mail accounts. If it works, the AOL.com portal strategy would be similar to Yahoo Inc.'s business model.
To provide the one-stop shopping experience for high-speed Internet service, AOL is partnering with telecommunications wholesaler Covad Communications Group Inc., a California firm that leases phone lines from the regional phone companies, providing access to about 50 million homes.
AOL will handle all the branding, marketing and customer-service calls while Covad will provide the high-speed phone lines and modems. David McMorrow, executive vice president of Covad, said the partnership with AOL is likely to benefit both companies because consumers will have the ability to get high-speed service through one phone call to AOL. He predicted that AOL's strong brand name nationally, coupled with Covad's coverage, would give America Online a way to begin recovering from subscriber losses.
"The two parties are putting together a compelling offer in the market, not only for AOL users, but for folks looking for a good combination of broadband and content at a competitive price," McMorrow said. "They have customers and brands and experience at the Internet layer, and we have the infrastructure, footprint and systems."
But if yesterday's aggressive price cutting by SBC leads to slashing in the price of high-speed Internet connections around the country, AOL and Covad may find themselves with fewer customers and less revenue to share than they had projected.