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8/2/2006
02:03 PM
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AOL Flips Business, Offers Service For Free

AOL will offer its paid services and e-mail to broadband users at no charge, a move meant to counter the huge loss in subscribers and shift to a primarily ad-supported business.

AOL on Wednesday said it would offer its paid service and email to broadband users at no charge, a move meant to counter the huge losses in subscribers and to shift to a primarily ad-supported business.

The change was less a choice and more a necessity as AOL, a division of Time Warner Inc., saw millions of dial-up subscribers leave over the last few years after switching to broadband. If the Internet service provider, the largest for narrowband users, had continued unchanged, it would have lost 30 billion to 40 billion page views in a year, or 10 percent of rival Yahoo's, AOL and Time Warner officials said in a joint teleconference with financial analysts.

"This will remove the biggest barrier to our members in staying with AOL," Jeff Bewkes, Time Warner president and chief operating officer, said.

Dick Parsons, chief executive of New York-based Time Warner, said the company board had approved the dramatic shift, which would be completed by early September.

"I believe the strategy we're about to take you through is quite sound," Parsons told analysts. "By giving AOL's valuable members the opportunity to stay with us free of charge as they shift to broadband, we will significantly accelerate AOL's transition to an advertiser-supported business model, and better position AOL to fully take advantage of compelling online trends."

Online advertising, a market that didn't exist when AOL started in 1985, has become the key revenue driver behind Web portals Microsoft MSN, Google and Yahoo. The latter two have grabbed the biggest shares of the online ad market, which is expected to reach $25.9 billion in the United States by 2011, or almost 9 percent of the total ad-spend, according to JupiterResearch.

AOL has sent its millions of subscribers email explaining the change in an attempt to hold on to its customer base, which accounts for 36 percent of the company's total visitors to its private and public Web properties, but 80 percent of their page views, Bewkes said. They also are responsible for 80 percent of AOL's online ad revenue.

The transition is expected to be completed by early September. During the shift, broadband users will be able to download at no charge the AOL desktop and email clients, which can be used to access most of the ISP's services, including parental controls, security software, such as anti-spam and anti-virus applications; Internet telephony and social networking.

The company also plans to notify by email former subscribers who have left AOL over the last two years of the existence of the free services.

People canceling their AOL subscriptions have complained of aggressive customer service reps who have made the process difficult. Jonathan Miller, AOL chairman and chief executive, promised easier conversations between service reps and current and former subscribers.

"We are simplifying the conversation that will be taking place in all our customer service centers," Miller said.

The transition is expected to cost Time Warner $150 million to $200 million in restructuring costs this year, Bewkes said. Shifting away from narrowband, however, is expected to lead to a reduction of $1 billion in costs by the end of next year.

AOL, based in Dulles, Va., plans to continue offering its dial-up subscription service, but says it will no longer aggressively market it. AOL members can continue to subscribe to its premium dial-up plan for $25.90 a month, including additional features such as 50 gigabytes of storage and unlimited premium customer services. Two lower-cost access plans are also available.

Besides expectations of increasing subscriber growth and ad revenues, AOL believes the change would lead to partnerships with cable operators and telephone companies offering DSL services. As an ISP, AOL was often seen as a potential competitor.

"We'll no longer be competing," Bewkes said. "Instead, we'll help them compete."

In addition, AOL would be making deals with Time Warner Cable, officials said, declining to discuss specifics.

Earlier in the day, Time Warner released second-quarter earnings showing that revenues from AOL declined 2 percent, or $51 million, from the same period a year ago to $2 billion. The drop was due to an 11 percent, or $188 million, decrease in subscription revenues. The decline, however, was partially offset by a 40 percent, or $129 million, jump in advertising revenues.

As of June 30, AOL had 17.7 million U.S. members, a decline of 976,000 from the prior quarter and 3.1 million from a year ago.

Time Warner as a whole reported that revenues increased 1 percent from a year ago to $10.7 billion. Net income was $1 billion, or 24 cents a share, for the quarter, compared to a loss of $409 million, or 9 cents a share, a year ago.

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