Beginning in the July billing cycle, AOL said Tuesday it will charge subscribers $23.90 for its monthly unlimited-use plan, a 9 percent increase from the current rate of $21.95. AOL has not raised the price of its unlimited-access service since April 1998.
The price increase underscores the Internet and media giant's confidence in its business despite the current economic slowdown. Company executives have said in the past that AOL Time Warner, the parent company of America Online, is resistant to a recession because of the company's multiple revenue streams, its ability to cross-promote its products, and its steady subscription income.
However, the price increase will likely test consumers' appetite for the service while opening the door for competitors to follow with their own rate hikes.
So far, Microsoft's MSN Internet Access, which has 5 million subscribers who pay $21.95 a month for dial-up service, said it does not plan to follow AOL's lead.
"It's not clear as to why AOL expects its customers to pay a premium for a service that does not offer the same level of features and functionality that can be found standard on MSN," said a Microsoft representative.
On Tuesday, AOL shares closed up 64 cents at $57.24. Shares in other Internet service providers rose in anticipation that they will follow AOL in raising rates. EarthLink shares gained 66 cents, or 5 percent, to $14.15, while Juno Online Services jumped 33 cents, or 23 percent, to $1.75. Microsoft stock was up $1.52 to $70.31.
CS First Boston analyst Jamie Kiggen said he believes competitors will follow in AOL's footsteps with price hikes of their own. EarthLink is likely to increase charges immediately, and Microsoft is likely to wait until the summer to raise its MSN rates, Kiggen said.
Wall Street anticipated the price
Source: Company Web sites
Paying the premium
When it comes to monthly unlimited-use subscription plans, AOL tops the price list among popular ISPs.
$19.95 Juno Web
$14.95 NetZero Platinum
Source: Company Web sites
However, AOL spokeswoman Ann Brackbill said Tuesday's price increase is "unrelated" to the company's earnings targets.
"It's about continuing to invest in the service," she said. Brackbill noted that the company is planning to release the 7.0 version of its software and unveil an online music service later this year.
Chairman Steve Case has stated that the company does not need to raise rates to meet earnings targets. AOL Time Warner stated a revenue goal of $40 billion and a target of $11 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) for the year.
Jordan Rohan, an analyst at Wit SoundView, estimates that AOL Time Warner will add $300 million in cash flow to the second half of 2001 with the rate hike.
"I don't think they need to increase rates to meet their numbers. I think they need to increase rates to beat their numbers," Rohan said.
In research notes issued by Morgan Stanley, analyst Mary Meeker made no changes to previously stated revenue and EBITDA estimates and said the subscription price increase is in line with expectations. Meanwhile, Kiggen raised his targets, slightly lifting fiscal 2001 revenue estimates from $41.2 billion to $41.4 billion and EBITDA earnings from $10.9 billion to $11 billion.
Kiggen says the price increase could give AOL an additional $200 million in revenue in the second half of the year, depending on the growth of new subscriptions.
Just moments after the news of the price hike hit, online message boards were flooded with reactions by AOL members. By midmorning, more than 100 messages had been posted on Yahoo message boards.
"If there was better competition out there, I would probably make an effort to change my service provider," said Jeff Dando, an AOL subscriber in West Tisbury, Mass., who said his neighborhood has no DSL (digital subscriber line) or cable Internet access. "There isn't any (alternative), and the (AOL) service has gotten better over the past several months."
Brant Silvers, who works at a consulting firm for nonprofits based in New York, has been using AOL's service on a free-trial basis since March of this year. Although he has tried to cancel the service on several occasions, AOL continues to extend free service offers. He is using the service at no cost until June.
When asked if he would start paying for the service after his free trial ended, he said no. He said it made no difference to him whether the service was priced at $21.95 or $23.90.
"I still think it's too much money anyway," Silvers added. "There are places where you can pay $10 for service."