America Online today outlined a broad new strategy to reinvigorate the troubled online service but warned that a precipitous drop in advertising next year would delay its financial recovery until at least 2004.
At a conference here with hundreds of Wall Street analysts and investors, AOL Time Warner Inc. executives said advertising and commerce revenue at the online unit would probably plunge 40 to 50 percent next year. The company also reported that the unit's overall profitability, based on one closely followed measure, would fall 15 to 25 percent.
The poor financial forecast sent the parent company's stock price downward, tempering an otherwise upbeat presentation about plans to enhance America Online's offerings with exclusive new content and premium pay services.
Executive after executive talked about plans to roll out discount shopping services and treat subscribers to such extras as free music downloads, sneak movie previews, and expanded access to Time Inc. magazine fare such as People and Entertainment Weekly. There is even a new voice-mail service that allows people to have their e-mail read to them over the telephone.
Some of the new content will be covered by existing subscription fees, but some of it -- probably an increasing amount as time goes on -- will cost AOL subscribers extra. America Online executives compared the plan to cable television: Customers can get basic cable for a certain amount, but if they want something extra -- HBO, Showtime or any of the other commercial-free premium channels -- they have to pay more.
The new strategy follows a difficult year for the Internet unit, which has been beset by slowing subscriber growth, falling ad revenue, and criminal and civil investigations into its accounting practices. AOL remains the world's largest Internet service provider, but its fortunes have fallen so low that the corporate parent earlier this year relegated the Dulles-based operation to a unit of a larger division -- less than two years after AOL used its once highflying stock price to acquire Time Warner Inc.
"AOL's new direction builds on AOL's past. This marks not just an important new beginning for AOL but a new beginning for AOL Time Warner. It is a new day," said AOL Time Warner Chairman Steve Case, who addressed Wall Street analysts and investors at the conclusion of the four-hour conference.
AOL's future is clouded by the advent of high-speed broadband access to the Internet. AOL caters largely to subscribers who reach the Internet over ordinary dial-up telephone connections. Analysts expect many of those customers to switch to faster broadband service offered by cable and digital-subscriber-line providers. As a result, AOL must persuade people to pay extra for its service even if they get to the Internet using another provider.
"We want to sell AOL on a stand-alone basis no matter whose connectivity you use," said Lisa Hook, president of AOL Broadband.
Analysts generally applauded AOL's decision to rein in expectations for a fast turnaround, saying such candor was an important element of the company's need to restore its image and credibility. But the near-term financial outlook helped push the parent company's stock price down more than 14 percent, closing off $2.36 a share at $14.21.
America Online's new chief executive, Jonathan F. Miller, predicted 2003 would be a transition year for putting the new strategy in place. The company projected revenue next year to be roughly $9 billion, cutting one key measure of profitability -- earnings before interest, depreciation, taxes and amortization -- by up to 25 percent. The chief cause of the decline would be a continued falloff in advertising and commerce revenue as several long-term deals dry up.
Miller said double-digit increases should return in 2004. He hopes to make up some of the lost revenue by running the online service much like a cable TV company, perhaps offering different levels of service for different prices. For instance, the company is likely to offer a basic Internet access service for a price that is lower than its current $23.95 monthly charge. It offers a higher-margin $14.95 plan for people who pay another provider for high-speed access. The company plans to begin marketing this service more aggressively.
One major presentation focused on how AOL would be working more closely in the future with the editors of some of Time Inc.'s magazines. That process will begin with exclusive content from People, Entertainment Weekly, InStyle and Teen People on AOL. No final decision has been made about whether those magazines will continue to have individual Web sites. AOL subscribers with high-speed Internet access will receive CNN's online video news service as part of their monthly package. The CNN service is currently available for $4.95 a month.
"Today's announcement is just the first step to putting even more AOL Time Warner content on the AOL service," said Don Logan, chairman of AOL Time Warner's media group. "Making this compelling content available on the AOL service is yet another new benefit for our members, delivering the best content to them first at no extra cost."
In addition to content from magazines, AOL will feature exclusive music debuts from the Time Warner music division and will begin selling digital downloads of singles. Warner Bros. Pictures will also give AOL users a first look from its upcoming movies.
AOL also showcased a new voice-mail service that would enable users to access their e-mail and voice messages by telephone. The feature is intended to bolster the company's offerings of new online games, greater anti-virus protection, and simplified bill-paying and tax-preparation services.
AOL's plan is a provocative one, and it highlights several issues that 21st-century media companies will face. But its closest comparisons come from the late 20th century, when nascent cable TV systems were trying to persuade subscribers to pay extra for HBO and other premium services. Despite HBO's current success, it was a money-losing business for its first seven years.
Sheldon I. Altfeld, who launched cable networks in the late '70s and early '80s, remembers well the pitfalls of asking consumers to pay for more services. Of particular note, he recalled, was the short-lived "mini-plan," in which cable subscribers were asked to pay a few dollars extra per month to get the Disney Channel and the Golf Channel.
"It was a failure," Altfeld said. "Both of those services eventually became basic services."
The issue of pricing will be a key one for AOL. Consumers are used to paying for access to the Internet, but generally not for the content provided on it. AOL must convince its users that the two are distinctly different and both are worth paying for.
"I think they have an excellent chance to pull it off, with one caveat," said Leo Hindery Jr., chief executive of cable's Yes Network and a former executive in the cable divisions of Tele-Communications Inc. and AT&T Corp. "They should have charged a little bit for [content] from the very first day. It is extremely difficult to go from zero to something. They need two pieces of pricing: a pricing for access and a pricing for product."
Ultimately, AOL Vice Chairman Ted Leonsis emphasized that the firm's future will be assured only if it maintains a satisfied, growing base of subscribers. "If you don't get members who love your product, nothing else matters," Leonsis said.
In a gesture symbolic of the company's renewed focus on its users, Case today sent a letter, prominently displayed with his picture on the AOL welcome screen, inviting subscribers to provide feedback. "We are committed to listening carefully to your concerns and suggestions," Case wrote. "Next month I'll write you again and summarize what we have learned."
Staff writer Frank Ahrens in Washington contributed to this report.