AOL Considing Offering Free Services to Broadband Subscribers

Posted on July 10, 2006

AOL LogoThe New York Times reports that AOL is considering to offer a free option to its broadband subscribers. Things would not change for AOL's dial-up customers. The move would cost AOL over $2 billion in revenues but it would increase AOL's advertising opportunities.
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.)

AOL has already lost lots of subscribers to faster DHL and cable services. AOL has also moved some of its content on the web where it can be accessed for free. AOL has also seen companies like Yahoo and Google offer free email services that compete with AOL's fee-based offer. These are part of the reasons behind AOL's customer drain. Obviously, AOL customers will be happy to no longer be charged. The question for AOL is whether they can really afford such a drastic move and how long will it take them to make up the difference in advertising revenue.

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