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AOL agrees to refunds

Reversing its week-old position, AOL reaches an agreement with at least 37 state attorneys general to give refunds and online credit to members.

Reversing its previous position, America Online (AOL) has reached an agreement with at least 37 state attorneys general to give refunds and online credit to members who have been unable to access AOL's system.

Those locked out of the online service's swamped system because of constant busy signals will be able to request refunds or credit for December and January, according to the agreement, which 37 states had signed as of this afternoon. Other states are still calling the office of the Illinois attorney general, who leads the negotiations, asking whether they can join the pact, said Lori Corrall, a spokeswoman in that office.

Jack Norris, a Florida assistant attorney general, called the agreement a victory for AOL's 8 million customers, many of whom have been locked out of the company's system since December. That's when the world's largest online service switched to flat-rate pricing for unlimited access, a change that encouraged more users to log on for longer times. AOL's network was not equipped to handle the huge spike in traffic, even though the company continued a $300 million marketing initiative to draw new members.

"The company anted up and did what it needed to do, which was to satisfy customers who weren't getting everything they bargained for," Norris said. "The company came to the table in good will and [AOL executives] have done the right thing--with a little encouragement from us."

While AOL did not admit any wrongdoing, it agreed to make it easier for members to cancel their service; to hold its membership level to 8 million for the time being; and to halt its ad campaign for at least the month of February.

The agreement comes after more than a week of intensive negotiations with at least 20 attorneys general; several more jumped onto the agreement at the last minute. AOL was under public threat of a lawsuit from New York state for alleged violations of local consumer protection laws. The New York attorney general had told the company that it had until tomorrow to respond or it would face a lawsuit.

More than a dozen AOL members also have filed class-action suits against the company, calling for refunds. It was unclear how this settlement would affect these suits.

One thing, however, is certain: The agreement will surely hit AOL in the pocketbook. Exactly how hard will become evident next month when the company reports its earnings.

For today, at least, the agreement seemed to help AOL's stock, which rose 5.67 percent today to 37-1/4. But in the longer term, the financial impact of today's deal remains in question.

The company will not automatically reimburse everyone. Instead, AOL members will have 120 days to file for refunds or credit, according to a complicated list of rules formalized today.

The agreement calls for the following:
Customers who signed up for the $19.95 unlimited access plan have two choices: getting a month of online credit or getting a cash refund based on online usage.
Anyone who complains to the company via telephone, a special fax line, or the U.S. mail will be given a month of online credit--no questions asked.
Alternatively, instead of online time, customers can get cash refunds based on the time they were able to spend logged on. Customers who spent zero to two hours on the service in a one-month period will get a full refund; those who spent 2 to 8 hours will get a 50 percent refund; and those who spent 8 to 15 hours online will get a 25 percent refund.
Refunds will be given out for December and January, and each month will be calculated separately.
Members will have 120 days to file for a refund.
AOL will have to stop advertising for new subscribers during the month of February. Only mail solicitations that have already been contracted for and television ads designed to educate the public about access fees will be allowed. Until AOL's system can handle all its customers, ads will have to carry a disclaimer disclosing the online service's access problems.
AOL set up a special fax number and post-office box in addition to its call-in number for consumers who either want to cancel their subscriptions or file complaints. The call-in numbers for filing claims or canceling is 800/827-6364. The fax number to cancel is 801/622-7469 for faxes. The address is America Online, P.O. Box 1600, Ogden, Utah, 84401. Members still will not be able to cancel the service online.

"I think it's the price you pay for success, and this is a one-time expense," Bob Pittman, chief executive officer of AOL Networks, told CNET with a characteristically positive spin.

He emphasized AOL's plans to spend $350 million on adding more modems. Pittman acknowledged, however, that if AOL had to do it all over again, "we would have built out a whole lot more capacity early on. No one in their wildest expectations would have predicted usage to have gone up so much."

Pittman, who started at AOL the same day the company announced its unlimited pricing offering, praised the agreement with the attorneys general. "[AOL and the attorneys general] are moving in the same direction, figuring out what's the right thing to do with our members. We had customers going to the attorneys general saying, 'Make them fix it.' That's a positive message. When you have those loyal customers, we owe them a lot."

The fact that consumers will have to take the initiative will work in AOL's favor, said Mark Mooradian, an analyst who follows the company for Jupiter Communications.

"It's the smartest thing they could have possibly done, to say, 'If you want a refund, please talk to us and we'll be happy to give it to you,'" Mooradian said. "It appeases the attorneys general and puts the responsibility in the hands of consumers. With human nature as it is, how many people are going to put down in writing or mail or fax AOL saying they want a refund?"

Altogether, the agreement helps AOL achieve its primary objective: damage control. And Mooradian said, "It seems to be working."

The agreement marks the second time the nation's attorneys generals have come down on AOL over its pricing. Attorneys gathered together in November, forcing the company to change the way it informed its customers of its pricing change.

AOL had been automatically converting all its customers paying $9.95 a month for five hours of access to its $19.95 unlimited pricing. But the legal authorities demanded that AOL get consent from as many of its customers as possible before they were shifted to the new pricing scheme.