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AOL to charge merchants rent

Merchants on AOL's "Shopping Channel" will pay annual rents of $125,000 and up when the service debuts later this summer.

With subscriber income virtually capped at $19.95 a month, America Online (AOL) is shifting its merchant revenue model to charge rent for storefronts on its private online service.

Rather than give AOL commissions on sales, merchants on AOL's "Shopping Channel," to be unveiled later this summer as a replacement for its "Marketplace" shopping area, will pay annual rents of $125,000 and up, said Wendy Brown, vice president of electronic commerce for AOL Networks. Commissions range from 5 to 60 percent today, she added.

"Under the commission system, there was no incentive for the merchant to offer compelling content," said Brown, citing the lack of financial risk that the companies had at stake to have a spot on AOL

Stock traders like the switch. They pushed the stock up 3-1/4 in late trading, when AOL sold for 67-1/2 a share.

When it launches, the new shopping channel will feature more than 15 shopping departments or categories. The current marketplace now has 70 merchants; another 400 are scattered throughout the online service.

Brown declined to say whether the new model will bring in more revenue than the commission system generated.

"The shopping channel is a small percentage of our total sales today. Yes, the new model will be a more stable [source of revenues], but, more importantly, it will change online offerings," Brown said. AOL spokeswoman Wendy Goldberg said merchants may pay both an upfront fee and a small commission, and some may remain on commission-only arrangements.

Brown said "We're offering commissions to large merchants in some cases. For example, if they offer exclusivity or unique programming to drive sales." AOL merchants should expect to recover their investment in a year, she added, though not all will do so.

Goldberg said AOL has more merchants wanting to get on the service than AOL could accommodate, implying that the online service has negotiating leverage to move merchants to the new pricing model.

AOL has foreshadowed its new strategy with a number of deals announced with new partners. Last month, CUC International (CU) agreed to pay $50 million over several years to market its many products on AOL. In February, Tele-Save Holdings (TALK) signed a $100 million deal to market to AOL members.

Analyst Emily Green of Forrester Research, a critic of online malls, thinks the new AOL arrangement makes sense.

"One of the things we learned from online merchants was that they have to take a more aggressive role in generating their own traffic," she said. "The merchants that have had the most success with AOL are the ones with whom AOL has close partnering arrangements."

She believes that having shopping options woven into lots of areas on AOL, not just in the segregated shopping area, will be the most successful strategy.

But for now, said AOL's Goldberg, the flat-fee arrangement applies only to the upcoming "shopping channel."

During its third quarter, AOL beat analysts' estimates, arriving at a slight profit by cutting marketing expenses. That drop in marketing expenses came as part of a legal settlement, in which the online giant agreed to cap its membership at 8 million until its infrastructure could support that volume of users.

The company, which had earlier reported to consecutive quarters of losses in the hundreds of millions, posted third-quarter net profits of $2.6 million for the period ending March 31, compared with profits of $15.1 million a year ago. AOL is scheduled to report its fourth-quarter results August 7.

AOL's revenues, which have been steadily climbing, reached $456.2 million for the third quarter, up from $312.3 million a year ago.

The company launched its flat-rate pricing system for subscribers last December, as competition from other Internet access service providers forced AOL to drop hourly fees. As a result, AOL's revenues shifted to reliance on advertising, electronic commerce, and renting its network.

Senior writer Janet Kornblum contributed to this report.