AOL: You've got VoIP

Beleaguered giant turns to hot Internet phone market in latest effort to bolster flagging dial-up business.

America Online is expected to launch an Internet phone service in the United States next month, leapfrogging rivals in a fast-growing market as it seeks to evolve from an also-ran provider of dial-up Internet access to a broadband services powerhouse.

Like Yahoo and Microsoft, AOL already offers voice chat on PCs as a free feature of its instant messaging services. AOL's new phone service, by contrast, will take a different path, charging customers a monthly fee to make calls over the Internet using an ordinary handset and a small analog-to-digital telephone adapter.

AOL has been testing a U.S.-based phone service with volunteers since last summer, and it launched a similar service in Canada in December. The online giant plans to introduce its VoIP, or voice over Internet Protocol, product to U.S. subscribers in mid-March and then offer it to nonmembers later this year, according to sources familiar with the plan.


What's new:
Facing millions of yearly subscriber defections, AOL hopes a new VoIP service can broaden its appeal to the growing number of broadband users.

Bottom line:
VoIP is relatively cheap to maintain, with the bulk of costs stemming from marketing and customer service, two areas of expertise for AOL. Still, it's a jampacked field, and AOL could find its efforts complicated by internal corporate rivalries, given sister company Time Warner Cable's ambitious VoIP plans.

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Sources said the cost of AOL's service will be competitive with other VoIP offerings in the market, where one low-cost provider, Vonage, charges $24.99 a month for unlimited local and long-distance calling. The AOL service will cost less than the $40 Internet phone service offered by corporate cousin Time Warner Cable, the sources added.

AOL declined to comment for this story. But analysts said VoIP is a business AOL cannot ignore, as one of the most recognized Internet services in the world.

"They already have customer service people plus a brand name," said Paul Kim, an analyst at Tradition Asiel Securities. "It's a no-brainer for any ISP."

AOL needs to build new businesses fast, and VoIP is one of the most promising developments around.

Still, Internet phone service highlights both opportunities and dilemmas for AOL. The world's largest Internet access provider is working to offset declining subscriber rates for its core dial-up service while regaining the good graces of parent Time Warner after the rocky merger of the two companies at the height of the Internet boom in 2000.

Consumers began signing up for commercial VoIP services in large numbers for the first time last year, offering companies like AOL the chance to create a new line of business with the potential for strong revenue growth at relatively low risk.

Cablevision, one of the first cable companies to launch VoIP services over its broadband network, saw subscriptions jump from about 28,000 at the end of 2003 to more than 270,000 by 2004--a growth rate of 1,000 percent. Time Warner Cable also jumped from a negligible number of Net phone subscribers in 2003 to 220,000 by the end of 2004.

The prospect of tapping into growth numbers like those holds understandable appeal for AOL executives. Since its numbers peaked

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