AOL hitches its star to entertainment

While defending itself from investigations into its accounting practices, shuffling its executive ranks and casting a wide net for new users, AOL Time Warner's online unit also is getting back to basics. Borrowing a page from the broadcast TV model, AOL executives are returning to the idea that offering exclusive content--whether acquired by third parties or created in-house--will give people a reason to join and stay on.

In one recent example, the company offered the first peek at actress Jennifer Love Hewitt's debut music video, "BareNaked." For other features, AOL is sifting through the vast music resources of Time Warner for exclusive content.

"I think the network model is a very interesting one, because the approach we're taking has many similarities," explained Kevin Conroy, who runs AOL Music and who will also head the company's overall entertainment strategy. "The Internet is a growing media outlet, and it provides us with amazing opportunities...to package audio, videos, photos and text together."

If that sounds familiar, it should. In the mid-1990s, before AOL had achieved online dominance, the company envisioned itself as another TV network of sorts where subscribers could get exclusive content. The idea was championed by then-President Ted Leonsis, who described his plans in a 1996 interview with CNET News.com.

"Every medium that develops goes through the phase of showing reruns and then taking steps to original content," Leonsis said. "I remember the days of Nickelodeon where 'Nick at Nite' used to show 'Gilligan's Island' and 'The Donna Reed Show,' or on HBO when it just showed movies. Now they show movies with their own programming, like 'The Larry Sanders Show' and 'Dream On.' That's what I see happening for AOL."

But it was Leonsis who had to dream on when AOL one month later hired Robert Pittman to oversee the company's online division. Although Leonsis was given stewardship of AOL Studios, which would provide the network original content and programming, Pittman shifted AOL's emphasis to striking advertising deals instead of investing in content.

Pittman, however, left the company last month, and AOL executives are publicly distancing themselves from some of his legacy. They claim that many of the deals under Pittman's watch placed cash over quality, sparking complaints by subscribers and overall annoyance at the advertising-heavy nature of AOL.

A lot is riding on the content-is-king strategy.

Subscriber growth at AOL has slowed dramatically--just 492,000 new customers signed up last quarter, compared with the 1.3 million who were added during the same period last year.

Subscriber satisfaction also is ebbing. On Monday, the University of Michigan released its latest American Customer Satisfaction Index, and AOL scored 59 out of a possible 100, the lowest of all companies measured in the Web portal category. Competitor Yahoo received 76, and MSN scored 72.

A ray of hope?
Conroy's division is crucial to improving those dismal numbers, and he's wasting no time.

AOL Music has begun producing its own content with Sessions@AOL, where subscribers can watch studio performances and interviews with popular musicians. Popular acts that have participated include P. Diddy (formerly known as Puff Daddy), Mick Jagger, Alicia Keys and Moby.

AOL Music also lets people listen to albums before their release to record stores around the country and offers sneak peeks at videos before their release on MTV. Although AOL Time Warner owns a major record label in Warner Music Group, all the major labels will have artists premiere material on AOL Music.

Earlier this month, AOL announced it was showing Jennifer Love Hewitt's first music video, "BareNaked." The video was streamed more than 1.4 million times, according to the company. And in June, AOL debuted four new songs from Bruce Springsteen's album "The Rising."

AOL Music's system of offering exclusives will likely become a model for other forms of entertainment throughout AOL, executives say.

"You can imagine a similar approach where we create a marketing event to launch a new video game or to give people a chance to watch or give feedback for new TV shows before they broadcast on a network," Conroy said.

These exclusive offerings, however, could also create new revenue streams by allowing the company to either charge more for a monthly subscription or impose additional payments for access. As with subscription cable channel HBO, people might be willing to open their wallets for content they can't find anywhere else.

This strategy could put it up against RealNetworks, whose RealOne SuperPass service has attracted 750,000 subscribers paying $9.95 a month to watch news clips from CNN and ABC or listen to Major League Baseball games. Like cable companies, RealNetworks wants to sell a basic subscription service with added premium channels, including, possibly, an adult channel.

Betting on the right horse
Still, competitors and some analysts question whether AOL's move is just a repeat of the Web industry's past failure to emulate the TV networks.

When Microsoft created its MSN portal in the mid-1990s, the software giant also tried to distinguish itself from rivals by offering original programs via streaming video to subscribers. These programs, most of them produced by amateurs, flopped because of their poor quality and high expenses. Microsoft has since refurbished MSN many times in its quest to topple AOL, turning to software services, and not just content, to boost MSN's subscriber numbers.

Multimedia content on the Internet is "in the infancy stage, and for the most part, those types of experiences require a broadband connection to really be useful," said Lisa Gurry, lead product manager for MSN. "AOL has struggled to demonstrate their broadband strategy."

Some of AOL's other competitors are hesitant to consider content as the driving force of their businesses. Yahoo is expected to launch its own high-speed DSL (digital subscriber line) service with SBC Communications by the end of the summer. The Web portal believes what people can do with their content will drive growth more than the content itself.

"The point is that it's not necessarily any piece of content; it's the flow to partner and (to) pull in a wide variety of content and present it in a highly personalized environment where the user is in control," said Jim Brock, Yahoo's senior vice president of major initiatives.

EarthLink, which has struck a number of deals with content providers such as online music service FullAudio, has also sided with the Internet's utilitarian nature. The company, which also has deals with photo processing site Snapfish and e-mail-by-phone service AudioPoint, has shelved its ambitions to own and produce content, although it once considered operating its own record label.

"We are pursuing those who use the Internet as a tool rather than those who use it as entertainment," said Michael Lunsford, an executive vice president at EarthLink. "I guess if I owned all the entertainment properties that (AOL does) I'd pursue the same strategy."

Furthermore, many who have followed the industry's boom and bust have seen too many examples of online entertainment failures. High-profile flops, such as the Digital Entertainment Network, Pseudo.com and even AOL Time Warner's Entertaindom, have not convinced the industry, or investors, that consumers want to use the Internet for entertainment.

For AOL, it will be an especially hard sell in the face of its ongoing problems.

"I just don't think the model has been proven yet, and clearly AOL needs some new and exciting ways of growing its subscriber base and revenue base," said Youssef Squali, an equity analyst at First Albany. "My point is, it's a show-me attitude--because we've been burned by them for quite some time."