Case: Rate hike "in the cards" for AOL service
Steve Case, the recently anointed chairman of AOL Time Warner, says a price increase for the America Online Internet service is likely but not imminent.
"I wouldn't be surprised if some point in the future we recognize the value proposition for AOL," Case told investors and analysts Wednesday. "A price increase at some point would be in the cards."
Case's intimation of possible price increases came as AOL Time Warner reported its first quarterly earnings results since the Internet giant acquired the media titan. The company beat average analyst expectations of 14 cents per share, reporting net income of $365 million, or 15 cents per share.
Revenue rose 8 percent to $10.2 billion, up from $9.5 billion during the same period last year.
Although the company's numbers were strong, AOL Time Warner has set aggressive financial goals for 2001. The company plans to reach $11 billion in cash flow and $40 billion in revenue. Raising subscription rates even slightly for its 27 million subscribers would go a long way toward this goal.
But Case admitted that raising rates in the near future would not be wise. The company has only recently concluded a year of tortuous legal wrangling with federal regulators. The Federal Trade Commission and the Federal Communications Commission attached concessions in exchange for approval of the merger. Competitors and regulators have expressed concern that the company may unfairly dominate content distribution in the future.
"It would be unwise in the days of getting the merger closed to do anything on pricing," Case said. "That wouldn't be smart."
AOL has not raised its fees since April 1998, when the cost of unlimited monthly access jumped to $21.95 from $19.95. A price increase of just $1 per month could increase revenue by some $300 million annually.
Analysts have predicted that AOL Time Warner might use its large AOL audience for increased revenue. Merrill Lynch Internet analyst Henry Blodget and ING Barings analyst Youssef Squali recently penned reports that said the company could boost its prices slightly without fearing an exodus of customers.
Not all analysts agreed. In a recent interview, Christopher Dixon, an equity analyst at UBS Warburg, said he didn't think AOL could raise fees without adding to the special features that it offers customers.
"The issue here is we need incentives," Dixon said. "I don't think there are sufficient feature sets to drive individual core users to pay a premium for AOL."
Case, who said he raised a host of "yellow flags" when AOL increased its rate to $21.95, said he wouldn't be surprised if rates went up in the future. However, Case added that an AOL rate increase isn't necessary for AOL Time Warner to meet its lofty financial targets for 2001.
"We do believe that we have a value proposition that is extraordinary," Case said. "We don't think there's any psychological barrier to raising prices."
Executives said the company could add more services in the future to justify an increase.