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AOL: You've got free e-mail

Company is looking to transform itself into a Yahoo-style media portal but still relies on ISP revenue. Can it solve the puzzle?

AOL could start looking a lot more like Yahoo.

Time Warner on Wednesday announced it will give away e-mail, software and other Web services for free to high-speed Internet users in a bid to boost online advertising sales.

"This is the next logical step for AOL to capitalize further on the explosive rise in broadband usage and online advertising," said Time Warner President and Chief Operating Officer Jeff Bewkes.

The AOL transition is set to be completed in early September, and the services to be offered for free include e-mail, instant messaging, a local phone number with unlimited incoming calls as well as safety and security features. AOL said it would continue to offer dial-up Internet access but will not aggressively market the service.

The move will further transform AOL, the country's largest Internet service provider--primarily through dial-up--into a Yahoo-style media portal specializing in offering free content and communications. For several years now, AOL has been moving toward focusing its resources on the Web in an effort to staunch losses from subscriber defections and take advantage of the lucrative online-advertising market.

This isn't the first time AOL has tried to reinvent itself to keep up with the Googles and Yahoos of the world.

"AOL has gone through at least four revisions of how it was going to evolve as people connect (to the Internet) via broadband instead of via dial-up," said Joe Laszlo of JupiterResearch.

"AOL's core strategy is still dial-up...but (dial up) is clearly waning and they do need to find a way to stay relevant in the broadband world," he said. "Longer term, the AOL strategy is definitely one of being a media company that maybe makes a little money on the side off subscription revenues."

What began in the 1980s as a bulletin board service and online game provider became, under eventual Chief Executive Steve Case, the most popular online service for newcomers to the Web.

"As long as millions of people are satisfied paying AOL $25.90 a month for dial-up, it doesn't make sense to kick them out the door."
--Joe Laszlo, analyst, JupiterResearch

In the mid-1990s, the company began charging a flat-rate fee for dial-up Internet access, adding a broadband service in 2001. It moved to a "Bring Your Own Access" plan in 2003, which let customers layer their AOL service on top of their existing broadband connection from a different provider.

In June 2005, AOL revived a strategy of bundling high-speed access, and a year ago it relaunched its AOL.com site, opening up to all Web users content previously available only to paying subscribers.

The moves were designed to stem the tide of subscribers who have been abandoning the legacy AOL service in recent years. The company has lost nearly 30 percent of its subscribers since September 2002. Meanwhile, Google has seen advertising revenues push its earnings and stock through the roof.

Time Warner earnings, AOL ad revenue up
Time Warner on Wednesday also posted a second-quarter profit on more digital phone and high-speed data customers and reported strong growth in online advertising as it disclosed its plans to offer the free services on AOL.

The company raised its full-year forecast for adjusted operating income before depreciation and amortization growth in the low double-digit percentage range from the high single digits after factoring in the purchase of cable operator Adelphia Communications and other items.

Second-quarter net profit was $1 billion, or 24 cents per share, compared with a net loss of $409 million, or 9 cents per share, in the year-earlier period, when it settled shareholder lawsuits. Revenue rose 1 percent to $10.7 billion.

Cable services revenue rose 15 percent to $2.7 billion in the quarter. It added 18,000 net additional basic video subscribers, 171,000 digital video subscribers, 230,000 residential high-speed Internet subscribers, and 234,000 digital phone customers in the quarter.

AOL revenue fell 2 percent to $2 billion due to an 11 percent drop in subscription revenue. It lost 976,000 U.S. subscribers from the first quarter, ending the period with 17.7 million subscribers. But AOL ad sales rose 40 percent.

Alliances with rivals
AOL, meanwhile, also is partnering with those companies it can't beat. For instance, the company made a deal with Google late last year in which Google will pay $1 billion for a 5 percent stake in AOL. The deal also involves partnering on ads, search, instant messaging and video.

AOL has been trying to keep up with the portal race to attract the widest swath of users by offering and beefing up Web services like e-mail and instant messaging. The more eyeballs a site has, the more ad dollars it can expect to take in.

The growth of broadband connections has made video a must-have for portals and other sites as well. AOL has mined Time Warner's vaults to compete on video. On Monday, AOL said it would preview a new video portal with more than 45 on-demand channels, a programming guide, video search and the ability to upload and share video.

But AOL isn't likely to dump its dial-up business, Laszlo said. The company has more than 18 million dial-up subscribers in what is a shrinking, but still large, part of its business.

"As long as millions of people are satisfied paying AOL $25.90 a month for dial-up, it doesn't make sense to kick them out the door," he said.

AOL faces a conundrum, said Gartner analyst Allen Weiner. The company should focus on its media business to survive but still relies on its ISP revenue, he said.

"I'm among those who believe that AOL cannot maintain two separate business strategies--one based on being a proprietary ISP, which is essentially a slowing if not dying business, and at the same time being a broadband Internet portal with a growing number of services and partners. They operate on two separate business models," Weiner said. However, "if they get rid of (the ISP business), they are going to have to convince people, primarily Wall Street, that they can make up that money some other way."

Ultimately, the path is clear for AOL, Laszlo said. The question is how fast AOL takes it.

"In a world where consumers seem reluctant to pay for core (Web) services and where online advertising is growing fast, where you have 18 million plus dial-up subscribers plus others who use AIM and other services, why not try to take advantage of that audience and build a more ad-centric business model?" he said.

Reuters contributed to this report.

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