One morning last July, America Online chief executive Jonathan F. Miller gathered two dozen of the company's top executives at the Ritz-Carlton New York to discuss their most vexing problem: What should AOL do about its shrinking subscriber base?
For months, the question was batted back and forth like a beach ball in the company's Dulles headquarters.
Some argued that a plan to give away e-mail service, news and music on the Internet would accelerate the loss of paying dial-up subscribers. Others, led by Vice Chairman Theodore J. Leonsis and advertising chief Michael J. Kelly, countered that the big money on the Web was being made on advertising. An "audience strategy" of giving away valuable content would lure users and advertisers, they said.
After listening, Miller stopped the meeting, left the conference room and went to his hotel suite for lunch. An hour later, he emerged with a new direction for the giant Internet company, which was losing 2 million subscribers a year.
"We're going to pursue the audience strategy," he declared.
In the ensuing months, Miller decided to go all the way, making e-mail accounts and an abundance of news, entertainment, music, sports and other programming -- the content that AOL subscribers always had to pay for -- available on AOL.com and other Web sites run by the company. "It is really about an AOL that is forward-looking and that has crafted itself for the future, as opposed to being tethered to the past," Miller said.
To make sure the world notices the changes, AOL is spending millions of dollars to host the biggest music webcast ever, on July 2. The company is a partner in rocker Bob Geldof's Live 8 African relief concerts, featuring dozens of popular acts, and will stream the event online from Philadelphia, London, Paris, Berlin and Rome on the AOL Music Web site.
"This concert will garner some interest," Standard & Poor's analyst Scott Kessler said. "All you need is to expose people to what you are offering and they will say, 'Hey I didn't know AOL had all this great stuff.' It is a way the company can reintroduce itself and its offerings to consumers."
Rather than advertising on television as it has in the past, AOL hopes to win business by spending millions of dollars promoting itself on Google and other search engines that have the power to send Internet users in its direction. The company is also making changes so that its network of Web sites shows up more often in search-engine results.
Even with those efforts, and the help of popular Live 8 musicians -- such as 50 Cent, Elton John, Paul McCartney, U2, P. Diddy, Stevie Wonder, Madonna, Mariah Carey, the Killers, Lauryn Hill, Faith Hill and Tim McGraw -- it remains to be seen whether America Online can hold on to a significant number of new visitors to its music site and its AOL.com Web portal, analysts said.
The world has changed since AOL made its name in the 1990s as the online gateway for millions of new computer users. People now are accustomed to getting online content free, while AOL has largely clung to a walled-garden model in which users must pay to get inside.
AOL's business challenges can be traced directly to the rapid shift in the residential marketplace from dial-up subscribers, who make up most of the company's 21.7 million paying customers, to high-speed-Internet customers, who connect to the Web through cable and telephone lines. Miller said he had to do something bold to vault AOL into this souped-up realm.
"We ran the danger of marginalizing the AOL brand," Miller said. "Great brands don't grow on trees. We have something, and we need to preserve it and move it into the future."
AOL's new strategy puts the company in direct competition with Yahoo Inc., which has shown double-digit growth from the surge in online advertising. Analysts said that AOL's continuing revenue from loyal subscribers, who want to keep their e-mail addresses and their $23.90-a-month dial-up connections, will give the company some breathing room as it makes the transition. Advertising revenue rose in recent quarters, and AOL executives said advertisers are hungry for new ways to reach consumers online.
AOL's corporate parent, Time Warner Inc., hopes the Internet firm can grow and jump-start Time-Warner stock. Like the shares of other traditional media companies, Time Warner stock has been flat for months. Time Warner Chairman Richard D. Parsons said he would consider a partial spinoff of America Online shares if AOL needs its own stock as currency to make acquisitions and propel growth.
"We all feel there is a lot of value in AOL that is not currently being seen in the way that Time Warner stock performs," Miller said. "One of our tasks is to get that value recognized and get to a place where it is easy to see."
Industry analysts said the new AOL approach seems like a sound attempt to adapt to a high-speed world, but they also warned that it is risky. For example, it could lead to an acceleration in the loss of paying subscribers, leaving AOL with less revenue and an urgent need to cut costs. More than 16 million people subscribe to AOL's dial-up service, generating billions of dollars a year.
David Card, an analyst with Jupiter Research, said it is inevitable that the drain of AOL subscribers will speed up because of the company's new strategy of giving away more features. "This will accelerate cannibalization," he said. "It is the right thing to do, but it is a hard thing to do and they have to manage it carefully."
The changes at AOL will not occur in a vacuum, either. If some of the company's moves succeed, they may be imitated by others.
"Their competitors are going to be eyeing this carefully," said Gartner Inc. analyst Lydia Leong. "AOL, despite its subscriber problems, remains a very well-known brand."
Kessler said the notion of AOL giving away content or communications features is not completely new. He noted that the company's heavily used instant-messaging system, AIM, is free. AOL used to try to attract new customers by mass-mailing CDs offering 45 days of free service.
Leonsis said adding e-mail accounts to AIM with two gigabytes of storage each and "@aim.com" e-mail addresses, is likely to bring Internet users back to AOL Web sites to check their e-mail. That is part of a strategy that has worked well for Yahoo.
Sponsoring the webcast of the Live 8 concert was savvy because it will enable AOL to expose millions of potential customers around the world to free e-mail and other features on its Web sites, analysts said.
AOL also plans to sell advertising on its music site and on AOL.com throughout the Live 8 concert and the following six weeks of on-demand playbacks.
If past scheduled concerts on AOL and Yahoo are any indication, a larger audience will listen to the playbacks after the concert, rather than on July 2. And they will do so just as AOL rolls out new free features.
"The timing is good for us," Miller said.
In addition to carrying all of the concerts live on its U.S. sites, AOL also plans to present live streaming video on its Web sites for Britain, Germany and France. In Britain, the BBC also has signed up to broadcast the London concert live on radio and on giant video screens set up around the country.
No deal has been announced to televise the concert.
AOL also hopes to earn goodwill from its association with the concert, which is not a fundraiser but an attempt to draw attention to hunger in Africa. As part of its coverage, AOL is helping to put together a virtual petition to which Internet users around the world can add their names, to be presented to politicians meeting in Scotland at the Group of Eight summit in July. The goal is to put pressure on the G-8 to do more to fight hunger.
Leonsis said AOL's involvement with Live 8 has the potential to make America Online cool after its brand lost some of its luster in recent years. "We have the opportunity to play offense again," Leonsis said.
But Miller said AOL must execute its new strategy effectively to turn things around, and that is a formidable challenge. "The operational risk is that we are building the equivalent of Yahoo in eight or nine months," Miller said. "It can spring a leak in any of a thousand ways."