AOL ready to reinvent itself

Not all that long ago, America Online looked unbeatable.

The country's largest Internet service provider lured millions of tech newbies online with its omnipresent dial-up discs and members-only content, offered an e-mail service that starred in a Hollywood movie, and merged with media giant Time Warner in a staggering stock transaction worth about $160 billion.

Needless to say, the merger fell short of expectations. Five years after the tech bust, AOL's bread-and-butter dial-up subscription business is declining because of cheap broadband Internet access. And Net stalwarts like Yahoo and Google, which AOL once dwarfed, are running away with the online advertising market.

But don't count out the company that made "You've got mail!" part of the American lexicon. In a clear acknowledgement that the Internet is maturing beyond dial-up service and so-called "walled gardens" of content, AOL is reinventing itself. The company plans to launch in mid-August a new portal that will make the services and content that were previously available only to AOL subscribers free to everyone. A beta version of the site has been public since early in the summer.

To back up the plan, AOL is reportedly spending more than $50 million on a marketing campaign that's scheduled to begin this week. Though ads will appear in magazines and newspapers, on billboards, and during some radio and television broadcasts, the heart of the campaign will be online, said Kevin Conroy, chief operating officer of AOL's media networks.

To many analysts, the move is a no-brainer. AOL's subscriber list has dropped from more than 26 million in March 2002 to 21.7 million this year, largely because AOL's dial-up customers are defecting to broadband. Subscription revenue declined by $116 million between 2003 and 2004, but ad sales increased $220 million, helping total revenue increase $100 million to $8.7 billion. AOL is scheduled to report its second-quarter results on Wednesday.

With numbers like that, it doesn't take a genius to figure out that advertising is where AOL should be moving its chips. The company's goal with the portal makeover is "to leverage the traffic we already have and recirculate it from one site to the next, and attract new users by opening up content to the Web, and monetize that more effectively by having a wider audience," said Jim Bankoff, executive vice president of programming and products at AOL.

A tricky balancing act
In other words: Build portal traffic fast enough to make up the difference for all those lost subscribers. And more traffic equals more ad dollars. "I believe in their strategy," said David Card, an analyst at Jupiter Research. "They're doing the right things, but they have to execute against that strategy."

It will be a tricky balancing act. "I would have told you by now they'd be looking for suitors for the dial-up business, but they've said it has high margins for them because they worked over the years to make it an efficient infrastructure," said Gartner analyst Allen Weiner. "That leaves you with the conundrum of can they do both? I don't believe they can."

Still, don't feel too bad for AOL, because the company is certainly not starting the free portal business flat-footed. In June, AOL was the fifth most popular Web site in the United States, with about 74.4 million unique users, trailing Yahoo, Microsoft, MSN and Google, according to Nielsen/NetRatings.

"Yahoo definitely has a head start on them," said Jeff Marshall, managing director of the digital marketing arm of advertising and branding company Starcom MediaVest Group. "But AOL has a library of content, essentially troops in the wings waiting to create original programming for the Web...It's going to be a great revenue stream for them to be able to put ads in front of assets they already have

 

or which they can efficiently produce."

AOL plans to dig deep into the wide variety of content available at the various Time Warner properties, which include HBO, CNN, People Magazine and Sports Illustrated, said AOL's Conroy. AOL is also working with Warner Bros. for movies and TV. Those sibling connections and AOL's still-large customer base give it a certain advantage over rivals, said Gerry Davidson, senior media analyst at Nielsen/NetRatings.

A portal for all comers
AOL's new portal features a main page with Web and video search, news headlines, movie listings links, and links to e-mail and AOL Instant Messenger services. Users can also create customized RSS (Really Simple Syndication) feeds of news and other content on a new My AOL page.

"With the addition of RSS feeds to the My AOL home page, AOL now offers a compelling alternative for a start page for many people," Chris Sherman wrote last week in a SearchEngineWatch article.

A major focus is multimedia. The new portal features a video page optimized for broadband content, with on-demand videos as well as clips from movies, TV, music and news, and exclusive concerts and live feeds. Its video search service offers access to more than 15,000 licensed and originally produced assets.

In early July, AOL hosted the Live 8 series of concerts, which attracted "double-digit millions" of viewers--"a new record in terms of peak simultaneous usage, we think, for any event on the Internet," AOL's Bankoff said.

"Live 8 was a watershed online video event," said Tim Hanlon, director of emerging contacts for Starcom MediaVest Group. "Once the concert is over, this thing is living on for weeks afterward in an on-demand way...No television network does that and no movie studio does that."

AOL, which owns MapQuest, AOL CityGuide and Moviefone, also announced a new music feature that lets users download free, legal MP3s from established and emerging artists, such as Tommy Lee and Interpol. The company is also lining up exclusive deals with established artists. Paul McCartney, for example, will offer his upcoming single "Fine Line" to AOL users the day before it ships.

In addition, AOL is beefing up its communications services. It's beta testing a new version of AOL Instant Messenger (AIM), the most popular chat program with more than 40 million active monthly subscribers. "="" data-asset-type="article" data-uuid="944acf8b-fedf-11e4-bddd-d4ae52e62bcc" data-slug="aim-e-mail-debuts" data-link-text="new free Web-based e-mail service">, which has two gigabytes of storage. The new AIM lets people manage their contact information and will enable them to make phone calls, send text messages to mobile phones, watch Internet TV and listen to online radio.

AOL subscribers will be paying for customer support, security features such as antispam, anti-spyware, antivirus and parental controls, and access to more than 200 radio channels at a higher quality and with no commercials, Bankoff said.

"It's a high-risk, high-reward situation," said Gartner analyst Weiner. "Everything looks really good, and everything performs well. The question will be: Can they convince the public they are truly moving away from a proprietary business and becoming a competitor to Yahoo, MSN and Google? They have to convince people that this is going to be their primary business."