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AOL's new business model

America Online will push multimedia this year in a continuing battle to draw users and revenue to its service.

America Online (AOL) will push multimedia this year as part of an ongoing battle to draw users and revenue to its service.

David Gang, AOL's vice president of product marketing, today unveiled three key services to be introduced by June. The changes come at a time when online services and ISPs are struggling to find a way to make money in a world where flat-rate pricing prevails.

The next version of AOL's proprietary software--AOL 4.0, or Casablanca--will be rich with photo, video, and sound capabilities. The service provider also is capitalizing on its most popular attraction: chat. It will introduce a feature that lets its members and Internet users talk to each other in a 3D-chat environment called Virtual Places.

And AOL plans to improve upon its new "push" product, Driveway. As previously reported, Driveway can be programmed to grab information from the AOL system and the Web for members to read later on.

Although Gang would not discuss financial issues, it is clear that the new features are aimed not only at pleasing customers but also at advertisers, on whom AOL is depending to generate profits.

The Driveway product, for instance, not only brings content to users' desktops but also delivers multimedia-rich advertising specially designed for Driveway. Casablanca, loaded with plug-ins and multimedia capabilities, will allow advertisers the flexibility of airing complex spots within the AOL network. Virtual Places will bring outsiders onto the AOL system whey they can participate in online forums and chats, viewing AOL ads when they do so.

It's all part of AOL's plan to tap new sources of revenue such as advertising and transactions, according to Mark Mooradian, who wrote a Jupiter Research report released today.

With AOL's move in December to begin offering unlimited access for one monthly price, the company is shifting from merely providing and distributing content, to developing online content as well, Mooradian explained.

That will mean more content partners--a strategy that Gang said AOL is continuing to pursue--and will mean finding a way to bring in money fast while it is making that transition, Mooradian added.

"Because AOL can no longer generate profit under its traditional subscription and usage revenue model, the company must look to more profitable but still unproven streams of revenue," he said. "These 'other' revenues include advertising, commerce, transaction-based services such as brokerage and travel, AOL-branded merchandise, and business-to-business services such as AOL-based intranets."

Also, expect "more joint venture deals between America Online and traditional media giants," according to Mooradian.

In fact, Gang said that AOL "is working with key AOL tenants to be anchor partners." When Driveway launches this spring, it will include about ten partners who will be pushing their content onto your desktop.

Casablanca also will be released in the spring; Virtual Places will be rolled out next month. Meanwhile, AOL has to contend with the present. And that's not always easy.

The good news is that people are logging onto AOL in record numbers, Gang said. But that's also the bad news. While AOL can now boast 7.5 million members--a growth of half a million in just a few months--it also has to deal with users who are constantly frustrated by busy signals when they try to get onto the service.

Several users approaching the AOL booth at Macworld Expo complained that they wanted to get onto the service but couldn't because they were constantly confronted with busy signals.

The problem is apparently compounded for Macintosh users who are using AOL's latest 3.0 software, which is still in beta. Like most beta software, that version is buggy and sometimes drops users.

But many complain that they can't even get on to begin with. Gang assured that those days of hair-pulling will be over in a few months. AOL installed nearly 20,000 new modems in December and will continue installing 30,000 new modems a month through June. The goal? To have enough modems to allow 400,000 users to simultaneously dial in by July 1. Currently, there's enough capacity for 250,000 users at once.

"It's horrible to get busy signals, but the reason we're getting busy signals is we're obviously doing something right," Gang said.