AOL to withstand rate backlash
While Internet advertising and commerce revenues are stronger, America Online maintains they still aren't enough to make up for increased costs.
AOL needed money to offset the rising costs of its unlimited service, and, at about the same time, it was finding its revenues growing and its membership turnover rate stabilizing.
Given such events, AOL executives felt that any backlash from raising its monthly rates by $2, or 10 percent, would be short-lived.
AOL's Robert Pittman on price increase and timing |
Today, while Internet advertising and commerce revenues certainly are much stronger than a year ago--and especially for AOL, which brought in a record $108.8 million from those categories last year--they still aren't bringing in enough to make up for what AOL says are the increased costs associated with members spending much more time online.
"The good news is we're trying to get people to use us more," said Bob Pittman, AOL's president and COO. "We want them to embed us in their lives. The only issue affecting cost is that that's happening at a faster rate than the growth of other revenue. It's happening at a faster rate than our ability to bring down the cost of connectivity on a per-unit basis and per-hour basis. But at the end of the day, I think that's what we're driving for--to make the service valuable."
At $21.95 per month, $2 more than most Internet service providers and $7 more than some, AOL had better be making the service more valuable.
"The price hike will increase members' sensitivity to all aspects of service quality, from log-on and email to perhaps pop-up ads," said David Simons, an industry observer and managing director of Digital Video Investments.
Subscribers who might have been willing to overlook those parts of AOL's service about which they constantly complain--the barrage of advertising and unsolicited email, occasional outages on portions of the service, chat rooms that can sometimes be chaotic--might not be so willing if they're asked to pay more. But AOL has some cash reserves, thanks in large part to the deals it has been cutting with its advertisers and other Internet businesses.
If the online giant must take a hit over price increases, this is as good a time as any. This time of year traditionally has been slow for new AOL memberships, so even if new users are turned off by the service's increased price tag, the net effect shouldn?t be huge.
AOL's Steve Case says members will understand |
Then again, it's too early to know for sure how the price increase will affect the market. Some are saying that this could be the proverbial kick in the pants that telephone companies such as Sprint and ATT need to prompt them to market their services better.
"I expect we'll see a flurry of competition," said Kate Delhagen, analyst with Forrester Research. We'll look back on this as a turning point when...some of the local telcos got serious about getting consumers online."
On the other hand, people have been complaining about AOL for years. But the service continues to grow every day and dwarfs its closest competitor, Microsoft Network, which has about 2 million members compared with AOL's 11 million.
Clearly, it is these members that AOL had in mind when it raised its rates. Pittman said the company had looked at other cost-saving options, such as putting a monthly cap on the number of hours a member could stay online for $19.95, echoing a move made by IBM; or charging premiums for certain aspects of the service, such as the ability to create five different screen names.