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AOL hits 10 million mark

The world's largest online service provider says it has added 3 million subscribers over the last 12 months in North America, Europe, and Japan.

America Online (AOL) today announced that it has signed up its 10 millionth subscriber, achieving that subscription milestone six weeks in advance of its New Year's target date. The growth was fueled by a booming overseas market as well as continued growth at home.

That makes the online service's user base more populous than all but seven U.S. states and larger than the combined readership of America's 11 largest daily newspapers, according to AOL. Analysts say AOL is now approximately four times as large as MSN, its closest competitor, and CompuServe, which it is in the process of acquiring. (See related story)

But with its growing membership, AOL faces growing pains. Maintaining access and customer service for those 10 million members is crucial to retaining them in an industry where turn rates are high, according to analyst Kate Delhagen of Forrester Research.

Burgeoning membership rolls have spelled trouble for AOL in the past. The explosion of online usage that resulted from AOL's switching from hourly to unlimited flat-fee rates overwhelmed AOL's capacity early this year. Disgruntled users sued the online service, which spent the next several months fending off state attorneys general and settling class action suits. (See related story)

And after completing the CompuServe acquisition, the company will have to contend with the service and bandwidth demands of another 2.5 million members. Another problem in retaining members is that the boundaries between online services, search engines, and content providers increasingly are blurring, creating Web-based competition for AOL content in the form of search engines such as Yahoo and Excite.

AOL's membership numbers are crucial to the company's strategy. When AOL went to flat-rate pricing in December, executives said they would have to rely increasingly on advertising and transactions to make up for revenue they lost by eliminating hourly fees.

AOL has been able to cut lucrative deals with advertisers willing to pay the online service millions of dollars just for the privilege of being able to put their messages and products in front of millions of eyeballs: the more members the service has, the more money it can make from outside sources.

AOL said its members make 1 million purchases every month, totaling more than $30 million in revenue.

"Hitting the 10 million mark is great for AOL, and great for the industry," said Delhagen. "The challenge for them now is to stay above that mark. Wall Street will be watching very carefully to see if they do."

"It's a good problem for AOL to have," she added.

AOL has invested millions of dollars in recent months to increase capacity. The company said it tripled the number of modems in the last 10 months, and currently adds 25,000 modems every month. AOL also says it has upgraded more than three quarters of its Net access numbers to support 56-kbps modems. Complaints about access have largely subsided, though some maintain that access, while much improved, still is not perfect. To compound matters, parts of the AOL system suffer occasional outages.

Delhagen praised AOL 4.0, the online service's soon-to-be-released software, but warned that if the rollout isn't managed carefully it will snarl the system as millions of users try to download the upgrade within a short time.

AOL is planning to release the upgrade slowly, as it has done with other aspects of the service.

AOL's current peak usage is 520,000 simultaneous users.

Even with its systems up and running smoothly, AOL still has to guard against losing its subscribers to direct-access providers. "The little guys like MindSpring and EarthLink are getting better and adding AOL-type services," said Delhagen, who also noted the threat posed by search engines' increasing content offerings.

Much of America Online's future growth may be outside America. The company has member bases in Europe, Canada, and Japan. About 8.6 percent of AOL's current membership is overseas, according to IDC.