http://www.nytimes.com/2006/07/10/technology/10aol.html
Jonathan Miller, chief executive, now sees AOL as a free ad-based service. Should AOL sacrifice its cash cow in hopes of finding a prosperous future? In two weeks, the board of Time Warner Inc., which owns AOL, will hear a proposal from Jonathan Miller, AOL's chief executive, calling for a near halt in marketing for AOL's 17-year-old Internet access service, price cuts for existing customers and thousands of layoffs. His goal is to devote all of AOL's energy into building its free Web-based services. Traditionally, when companies have profitable but shrinking businesses, like AOL's access service, they try to milk as much money as they can from them without investing new cash. Indeed, that is what Mr. Miller has tried to do for the last several years. Mr. Miller will defend his unusually draconian plan by arguing that trying to wring every last dime from its dial-up subscribers is preventing AOL from being as aggressive as it can in competing with Yahoo, Microsoft and Google on the Web, according to AOL executives involved in developing the proposal. With such powerful and fast-moving rivals, he wants to hasten the pain to speed the recovery. This plan will require the board to accept lower profits at first until the advertising revenue grows further, the AOL executives said, although they declined to say how much profits would fall and at what rate. (The AOL executives spoke on the condition of anonymity because the plan is not scheduled for public announcement until Aug. 2.) Jessica Reif Cohen, an analyst with Merrill Lynch, estimates that this plan could well cut its revenue from domestic subscriptions (both dial-up and high speed) by 52 percent, or $2.1 billion at an annual rate. And AOL's operating profit could fall by $251 million, 14 percent of her estimate for this year. "Things are going to get worse before they get better," she said. It is unclear, she said, how long it will take to see improvements. "Every conversation we have is: what is the inflection point? When do the subscriber losses get offset by the growth in advertising? Nobody knows this." Mr. Miller will most likely say that his plan will help build the company faster because it will eliminate the conflicts between preserving the past and building the future. Until now, AOL has been trying to promote its free Web sites even as its television advertising has promoted its dial-up access service, which to many people is the way Grandma gets her e-mail. AOL's employees, moreover, are locked in a constant battle over whether each piece of software or bit of content should be used to retain subscribers or to lure new Web users. Under the new plan, almost everything AOL offers - its content, software and AOL.com e-mail addresses - will be available to any Web user free. There may be some exceptions - some advanced virus protection and parental control software, for example. And telephone customer service will probably be reserved for paying users. Mr. Miller also hopes this plan will help Time Warner's lagging stock price, even before AOL's fortunes turn around. Time Warner's shares closed at $16.84 a share on Friday, down more than 11 percent from its 52-week high. For the last few years, even as AOL urged investors to look at its growing advertising revenue, Wall Street has been fixated on its declining subscription revenue, which has more than offset the advertising gains. By killing off the subscription business line, he hopes, in effect, to end the death-watch mentality of investors. As an analyst, Ms. Cohen says she is not appeased by this aspect of the plan. "It is always bad if you are doing something for the Street," she said. "They should be doing this for their business, and the stock will follow their performance." The investors who have looked at AOL's advertising performance so far have not seen a clear picture of a turnaround. Last fall, the company started promoting the free AOL.com, which featured most of the content it had offered its paying subscribers. AOL says 35 million non-subscribers have used the free site. But it has not replaced the traffic lost from subscriber defections, because subscribers view many more pages than non-subscribers. And each page, of course, is an opportunity to display advertising. In May 2006, 14.8 billion pages were viewed on AOL's branded service - by both paying users and others - down 27 percent from a year earlier, according to comScore MediaMetrix. In the same period, Yahoo's page views increased by 10 percent, to 38.1 billion. In recent months, AOL says its overall page views have stabilized, and advertisers have started to notice that the freefall has stopped. "It appears they are attracting more eyeballs to the service than they are losing from subscribers, but it is not significantly more," said David Cohen, a senior vice president at Universal McCann, a media buying agency. "It does not appear to be a home run, but it is directionally positive." Despite the loss of audience, AOL's advertising revenue has grown. It is benefiting from rising advertising rates and technology from its Advertising.com subsidiary, which allows it to be more effective in how it places advertisements on each page. Still, AOL continues to lose advertising market share; even though its ad revenue increased 26 percent, to $392 million in the first quarter, Yahoo and Google grew far faster. AOL executives say they believe they are poised to accelerate their advertising business. They have renovated their advertising technology and have also stabilized their relations with Madison Avenue, which have been stormy for half a decade. "The re-launch of AOL.com has been the fresh start they needed," said Jeff Lanctot, a vice president with Avenue A Razorfish, an online advertising agency. "It caused the marketing community to give them a second chance after a number of years of being a frustrating, hard-to-work-with also-ran." Moreover, the new strategy will let AOL keep its most attractive customers - those who have stuck with it for years - even as they move to high-speed service. AOL hopes to work out deals with cable and phone companies to make it easy for AOL members to switch to high-speed service and keep their AOL e-mail addresses. They will also be able to use AOL's software client, which some have gotten used to as a way to navigate online, without an additional fee. This is important, AOL executives say, because people who use the AOL software view many more of its pages, and thus its ads, than those who use a regular Web browser. AOL further hopes it will be able to lure back members who quit recently by offering them their old AOL.com e-mail addresses. Mark R. Goldston, the chief executive of United Online, a low-priced dial-up Internet access service, said AOL might not be able to lure very many customers back. "Once you've moved on and given everyone your new e-mail address, you've moved on," he said. Mr. Goldston also noted that dial-up Internet access had become phenomenally profitable in recent years as the wholesale telecommunications costs to providers like AOL have fallen from 45 cents an hour to less than 6 cents an hour. Still, he suggested that AOL is making the right choice to pull away from its position as a premium-priced provider. (AOL's list price is $25.90 a month, for either dial-up or high-speed access, although it has many less expensive plans.) "If I were AOL, and I had all the incentives Time Warner has, I would do what they are doing," said Mr. Goldston. But even as AOL backs out of the Internet access business, it is still unclear what the thrust of its Web marketing will be. "AOL is a brand in search of a strategy," said Richard Greenfield, an analyst with Pali Capital. "Ask any person what is AOL, and they are not sure anymore." Some of AOL's highly promoted initiatives appear to have failed, he added, like a new version of its AOL Instant Messenger software that is slow and cumbersome. AOL has retreated and started to make its older, faster version available, too. AOL has had more success with its new video-oriented sites, such as TMZ, a celebrity gossip site, and In2TV, a collection of TV reruns from Warner Brothers, its corporate sister. And it is developing a new video search service for later this summer. "AOL is like Chicago after the Chicago fire," said Michael Zeman, the director of insights and analytics at Starcom MediaVest, a media buying agency. "They were so far behind the big guys; they are better positioned to come out with a broadband platform that is probably ahead of MSN or Yahoo." AOL has other issues to confront. Over the last year, it has lost a number of top managers, including Michael Barrett, the head of advertising sales; James Riesenbach, who ran search; and David Gang, who was in charged of software development. And Mr. Miller is now being supervised by Jeffrey L. Bewkes, the president and chief operating officer of Time Warner, rather than by Donald Logan, who retired at the end of 2005. By all accounts, Mr. Bewkes, who is seen as the leading candidate to succeed Richard D. Parsons, Time Warner's chief executive, has taken a very active role in AOL and has grilled Mr. Miller extensively on this new plan. As Mr. Miller makes his presentation to the board, its members may well recall earlier strategies he promoted. At first, he championed a plan for AOL to emphasize online shopping, such as ticket sales. Then he tried to sell a premium subscription service with exclusive content. More recently, he also had high hopes for the $25.90-a-month high-speed Internet access service, which has not taken the market by storm, as well as the free AOL.com site. Ms. Cohen of Merrill Lynch said she had lost count of AOL's various revival plans. "This one seems to make sense," she said, "but so did their other strategies." Gregory S. Williams [EMAIL PROTECTED] Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list [email protected] To unsubscribe send an email to: [EMAIL PROTECTED]
