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AOL tests freebie boundaries

The company offers some of its instant messenger users the chance to connect to the Web through America Online for free, boosting its standard 45-day trial offer to 60 days.

America Online is sweetening its standard free trial offer for a test group of people using its AOL instant messaging service.

In its various experiments with pricing and special offers, the online giant is offering a small number of AOL Instant Messenger (AIM) users a chance to receive 60 free days of AOL Internet access. That's 33 percent more than the standard 1,000 hours for 45 days that AOL usually doles out to lure new subscribers.

The pitch caught the eye of one Wall Street analyst who published the finding in a note to investors. The offer comes at a time when investors are raising flags about AOL's subscriber growth. They fear the division's subscription growth is slowing, forcing it to dole out free trials to maintain its rate of new additions. In the long run, more freebies could lower the amount of revenue AOL generates off each subscriber.

"We don't really know exactly what's behind it," said First Albany analyst Youssef Squali, who publicized the pitch in a note to investors. "At face value, this shows that company is trying to continue to grow its subscriber base by just giving more and more freebies."

For its part, AOL insists that the offer is not new. Rather, it's one of "hundreds" of experimental deals the company typically offers to AIM users, many of whom are not AOL members and have downloaded AIM software for free.

"This is one of several variations of offers and price points for potential new users," said AOL spokesman Andrew Weinstein. "This is not a general offer for all members unless you were someone who was participating for the test."

Weinstein wouldn't elaborate on the other types of offers pitched to potential subscribers. He also stressed that a change in the company's standard free trial of 45 days is not in the works.

Wall Street has begun flagging the AOL unit as the primary drag on AOL Time Warner's financial performance, citing flat revenue growth stemming from effects of lackluster online advertising. In addition, analysts are concerned that subscription growth is slowing, leading many to wonder if AOL's golden age is nearing an end.

AOL has offered free trials for many years as a way to lure first-time Internet users. Its use of free trials, bolstered by the ubiquitous presence of CD-ROMs, has helped AOL become the largest Internet service provider in the world, with 34 million subscribers as of March.

Furthermore, AOL said its free trial members aren't just freeloaders. In exchange for the trial, people must submit their credit card information and be subjected to third-party advertisements and promotions throughout AOL. These people are also counted as part of AOL's 34 million users, though the company will not break out what percentage of this population is accessing the service for free.

Despite AOL's massive online population, signs of its increasing reliance on free trials concern many on Wall Street. While extending free trials has helped maintain its subscription growth rate, analysts such as Squali fear this could lead to a decline in its average revenue per user, a more important gauge of AOL's health than bulk subscribers.

"It's a bad thing because you're adding customers who aren't paying you anything, and you're probably incurring $6 to $10 a month to provide telecom costs," Squali said.