AOL leads the Internet service market by margins that seem insurmountable in the near term. The online service tends to add as many users in a few months as its nearest competitors have managed to attract altogether.
But looming on the horizon are competitors and challenges that may provide a more credible threat to AOL's dominance, including the entry of telcos, the promise of widespread broadband access by cable, and a potential proliferation of free Internet service providers.
Merrill Lynch analyst Henry Blodget yesterday warned that while AOL continues to demonstrate impressive growth, it will have a tough time living up to expectations.
"Expectations have gotten ahead of reality," Blodget said after releasing a note on AOL's member numbers. He wrote that AOL told analysts it would sign between 750,000 and 850,000 subscribers for the quarter ending this month, considerably fewer than some analysts had predicted.
AOL's stock has taken a hit lately as well. It was down 5.63 points today to 99.88, way off its 52-week high of 175.5.
AOL reached its position at the top of the heap by starting early, signing subscribers in Internet prehistory nearly 15 years ago. EarthLink, by contrast, launched in 1994. MSN launched a year later.
In addition to being early, AOL has successfully marketed its service to the consumer market and managed to pass million-member milestones at a breakneck pace.
AOL had been on a roll adding subscribers, signing another million members every month or so. According to AOL, it surpassed 14 million paying members on November 12, 1998; 15 million on December 30, 1998; 16 million on February 9, 1999; and 17 million on April 14. These numbers include members who sign on to AOL's proprietary online service while supplying their own Internet access, and it does not include the roughly 2 million members of CompuServe, which AOL acquired.
Independent analysts have pegged AOL's numbers somewhat lower. Forrester Research, in an April report, said that AOL had 15.3 million members in the first quarter of the year, including CompuServe members. AOL said Forrester's numbers were mistaken.
Moreover, AOL is doing much better at home than abroad, according to Blodget's note. He said U.S. growth is "significantly stronger than expected," and growth in Europe and Japan is weaker than expected.
AOL would not comment on Blodget's projection. But the company noted that subscriber revenue was $869 million last quarter, a 50 percent rise over last year, and said it is on track for this year.
A slowdown in subscription uptake could come about as a result of the free ISP wave hitting parts of Europe, particularly the United Kingdom. Europeans have to pay by the minute for telephone access, and many Internet service providers and other businesses have taken to offering free Internet access in order to ramp up online advertising and e-commerce opportunities.
In the most recent example, Dell Computer said it would offer free access in Europe.
Free access poses a special problem for AOL. While competition in Europe may tempt AOL to offer a similar free service to drive its already considerable e-commerce and advertising model, it would be awkward for AOL to charge its U.S. customers but not those in Europe or elsewhere.
AOL president Bob Pittman has said AOL is open to the idea of providing free service in a system such as the United Kingdom's, where telcos share part of the telephone connect charges with the Internet service provider, if it proves to be a sustainable business.
Home court advantage not guaranteed
But AOL does face threats at home as well as abroad. For one, infrastructure providers such as AT&T are starting to ramp up their plans to provide Net access via cable as part of broad-based communications packages. The coming demand for broadband access, together with AT&T's acquisition of cable giant TCI, has put the squeeze on AOL to get its broadband ducks in a row.
Although AOL has formed partnerships with DSL (digital subscriber line) providers, the competing technology for providing high-speed access, the initial winner in the broadband race is expected to be cable.
"The unfortunate thing for AOL is that being the largest doesn't necessarily make you more than a target," said Rob Enderle, analyst with the Giga Information Group. "In terms of sustaining competitive advantage, it doesn't look good in the long term for AOL. The market is moving toward a place where the folks who own the infrastructure have the advantage. It's not going to get any easier for AOL."
AOL counters that its DSL plans and the loyalty of its users will help it weather the coming cable storm.
"We believe that we are going to be able to offer the AOL service over multiple providers," said AOL spokesperson Ann Brackbill. She noted that 80 percent of those who come to AOL over a broadband connection have kept their AOL account. "Broadband is an add-on rather than a replacement," Brackbill said.
Brackbill added that AOL's highest penetration and lowest "churn" rate--the rate at which users cancel their subscriptions--is in areas where high-speed cable access is available.
"It typically happens when advertising and marketing increases in a category," Brackbill said. "The biggest brand wins. People think about the Internet, and when they decide where to go they are predisposed to the biggest brand: AOL."
AOL also is counting on the prediction by some analysts that widespread broadband access won't present itself for a few years. It expects the biggest market over the next few years to continue to be people coming online for the first time, mostly through traditional dial-up connections.
One hope for AOL is to lobby governments to legally compel cable service providers to share the wealth. Last week a federal judge ruled that city and county officials in Oregon could require AT&T to open its high-speed cable networks to competing access providers.
AOL is said to be planning a demonstration of such an access-sharing initiative with GTE to undercut opponents' arguments that sharing the cable networks is feasible.
News.com's Stephen Shankland contributed to this report.