AOL goes on the offensive

Even Bob Pittman gets busy signals when he dials into America Online (AOL). And he's the chief executive of AOL Networks, the Internet's number-one online service.

"It is aggravating," Pittman told CNET in an interview today. "I will tell you that we do have more demand right now than we have capacity for. The only real solution is to get more capacity and more modems in faster. That's the phrase around here: 'Do it quicker.'"

In a departure from their usual style, AOL executives today went on the offensive in response to a barrage of negative publicity generated by users. Many of them are angered by continual busy signals when they dial into the network, confused about a new pricing plan, and frustrated over the inability to cancel their subscriptions online.

Executives tried to put a positive spin on the controversy, saying they are taking several steps to improve service to their exponentially growing membership: They'll be spending $100 million more than originally earmarked to beef up their network, they're increasing customer support, and they're decreasing marketing. That means good-bye to that AOL television commercial with the Jetsons theme--at least for now--and fewer free software disks in the mail.

AOL also will be pushing its "bring your own access" plan, which allows people to log onto AOL using their own Internet access and does not clog the dial-up access. The cost: just $9.95 a month, compared to $19.95 a month for unlimited access on AOL's network.

But the changes are scheduled to be rolled out over the next six months and won't do much to alleviate busy signals in the short term.

That's why America Online CEO Steve Case even appealed to AOL members themselves to become a part of the solution. "There's also something you can do to help, and that is to moderate your own use of AOL a bit, during our peak evening periods," said Case, chief executive of AOL Networks' parent company. "Just as you would be sensitive about using a public phone booth if others were waiting in line to use it...it would be helpful if you could be considerate of the needs of other members."

It's an appeal AOL has made before. When the service was about to go to flat-rate pricing, the company sent out a mass mailing telling them to expect the service to be busy during peak hours and asking them at that time to moderate their usage.

Pittman added that with the proliferation of busy signals, he thought users were hoarding the online hours they did have, staying on longer than they normally would because it was so hard to get on in the first place.

Despite all the problems, AOL also reported today that its fortunes are improving since it launched a controversial flat-rate pricing plan in December. AOL membership is growing at record rates.

It grew by 500,000 in December alone, bringing the total to 8 million customers--leagues ahead of its nearest competitors. The company also said old members are coming back and the so-called churn rate, which measures customer turnover, has declined.

Pittman attributes the usage surge to two factors: people taking advantage of having all the time they want online for $19.95 a month and AOL riding on the coattails of the Internet's popularity. "This is a magic moment for the online world," he said. "We've seen TV viewing drop for the first time in my life."

But AOL's growth has come at a major cost. About a half-dozen AOL members have filed lawsuits against the company this week, claiming they were cheated out of their monthly fees because they couldn't get onto the system. And many who didn't sue have been complaining vociferously. State attorneys general also may investigate the matter.

Members had charged that AOL largely ignored their problems, simply telling them that it's beefing up the system but giving no detailed explanation. They also complained that it can take as much as an hour to reach a customer service representative by phone.

Today the company seemed to take the criticism to heart. The usually press-shy AOL showered the media with press releases and granted interviews with the top brass.

"There's no issue here that's getting higher priority than this," Pittman said.

AOL outlined these solutions:

The company increased the amount it will spend to beef up its network from $250 million to $350 million during the next six months. The money won't be earmarked for more modems, something AOL already is doing at a rate of about 30,000 a month through June, bringing the total to 350,000 modems by July. In layman's terms, that means the network will be able to handle 400,000 users at the same time, including those who use another ISP for access. The upgrade also will help AOL with its plan to invite more "bring your own access" members to the network.

The company is cutting back on its marketing efforts because it is overwhelmed with subscribers. AOL is in the middle of a $300 million marketing campaign for the fiscal year ending in June. Much of that money is dedicated to prime-time TV commercials. In December, it cut back its direct marketing efforts by half.

Clearly reacting to consumer complaints, the online service is adding 600 customer support people to its staff of 4,000. It also is planning to break ground next month on a 180,000-square-foot data center to handle more traffic.

Pittman said AOL is making the changes as fast as it can and is comfortable that AOL members will not be abandoning the service in large numbers.

Since its inception, the online service has suffered from problems related to churn: Although it gains new members quickly, historically it has lost them quickly, creating a high (and costly) turnover.

AOL executives will not release new churn numbers until their earnings are reported next month. But Pittman said the increased usage shows that people are not leaving. In fact, he and Case said many members who had quit the service because of its high hourly rates have recently returned.

"It probably is a testament to the fact that AOL is unique," Pittman said. "If [consumers] didn't want AOL, they'd go somewhere else."

Of course, users have said that even those who want to go somewhere else cannot do so. While it's a breeze to sign up on AOL using a computer and a modem, it's impossible to sign off the same way.

AOL does not accept online sign-offs because it had problems verifying them, David Gang, vice president of product marketing, has told CNET.

Instead, users have to wait to talk to an operator to cancel an account. Many customers have complained that they have been billed even after signing off.

Regardless of customer complaints, the market--unpredictable and emotional when it comes to AOL--is apparently responding to the company's strategy. In the same week that it received so much bad publicity, AOL's stock rose. It closed today at 41-3/8, up 3-3/8 from yesterday.