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Did AOL inflate subscriber numbers?

America Online sold about 830,000 Internet subscriptions in bulk deals at deep discounts, boosting its 2001 and 2002 subscriber numbers, according to a source.

AOL Time Warner's online division sold about 830,000 Internet subscriptions in bulk deals at deep discounts, boosting its 2001 and 2002 subscriber numbers, a person familiar with the matter said Friday.

The subscriptions were sold to marketing partners for as little as 20 percent of the regular price and contributed about 15 percent of AOL's subscription growth during the period, the source said.

Shares of AOL Time Warner, the world's largest media company, fell nearly 2 percent Friday morning on fears of the possibility of further credibility damage at America Online, which has been dogged by federal probes into its accounting practices for some advertising deals.

Analysts said such bulk deals are common, but some were surprised by the low price tag on the AOL deals. Analysts have been closely watching subscriber numbers to determine the health of the online unit.

The deals let some of the marketing partners offer AOL's limited-use Internet service for $1 to $3 a month, compared with its regular $5 or $10 price tag, the source said.

The source said all the bulk deals, which mostly affected subscriber numbers in the end of 2001 to 2002, have been completed and those subscribers are now off the books. The Wall Street Journal first reported the bulk deals Friday.

An AOL representative declined to comment.

"Stock-wise the reaction is going to be shoot first, ask questions later," said Fahnestock analyst Peter Mirksy. "There are a range of shoes to drop, or bad news, investors were somewhat expecting. This falls a bit outside of that range."

AOL had disclosed the bulk deals in its 2001 filing with regulators. Don Logan, the executive that oversees AOL Time Warner's media and communications group, said Wednesday the company is "cleaning up" its subscriber numbers.

AOL Time Warner Wednesday.

The AOL division said it lost 846,000 dial-up subscribers in the second quarter, with about 45 percent of that loss coming from non-paying subscribers that AOL is clearing off its count. Executives said they want to focus on profitability rather than total subscriber growth.

The source said the impact of the bulk deals was minor in the second-quarter declines, but the completion of those deals did contribute to the 1.2 million U.S. subscriber losses America Online has seen in the last 12 months.

Story Copyright  © 2003 Reuters Limited.  All rights reserved.