In the report, analyst Holly Becker argues that AOL has had little success striking deals with cable partners largely because companies like Comcast, Cox Communications and others have been successful in landing high-speed subscribers without AOL.
Becker notes that even AOL Broadband over Time Warner Cable hasn't gained traction, adding that there "appears to be challenges rolling out the high-speed service."
That means the economics of AOL Time Warner's broadband business--a main reason behind AOL's merger with Time Warner--have changed, she said in the report. Becker dropped her rating on the stock from "buy" to "market perform."
"The company may be losing leverage at the broadband bargaining table," Becker said.
In early trading, shares of AOL Time Warner were the most active on the New York Stock Exchange, falling $1.79, or 7 percent, to $23.73.
The worries over AOL Time Warner's broadband business come at a critical time for the company. Growth for AOL's "narrowband," or dial-up, business is slowing, something most analysts had expected to be offset by customers migrating to broadband services. Couple that slowing growth with a decline in advertising, and Wall Street is worried about AOL Time Warner, a company that has been trying to regain credibility after a disappointing 2001.
"AOL and Microsoft are the two largest dial-up Internet service providers, and they both suffer from the same problem with broadband rollout: EarthLink beat them to the punch, and so did the telcos" and cable companies, said Rob Lancaster, an analyst at The Yankee Group.
There are about 11 million broadband users in the United States, including 7 million cable subscribers and almost 4 million who connect through DSL, Becker said. Right now, AOL is trying to convince the cable companies that offering AOL's service will help them boost those figures and bring in new customers.
AOL executives said they had no comment on Becker's report. But the company has said it is convinced that people will clamor for the broadband version of its service once they get a look at it.
"When you get this broadband platform into the home, it will spawn a revolution," CEO Barry Schuler said in a recent interview with CNET News.com.
The trouble is, the cable companies haven't been doing all that badly on their own, grabbing the "low-hanging fruit"--heavy users and early adopters, Becker said. Future subscribers will be harder to obtain, however, which could give AOL more leverage.
And cable companies are understandably wary of signing deals with a company that also owns one of their competitors, said Yankee Group's Lancaster.
One way AOL could lure the cable companies would be to change the revenue-sharing agreement it's offering, giving cable companies up to $30 a month per subscriber. That's higher than many financial analysts had been projecting.
Consumers can sign up for AOL's broadband service to be carried over an alternative carrier, and around 1.3 million currently do that, Becker said. But it's an untenable position for the consumer, Lancaster said, since he or she is paying for access to both the Internet and AOL.
Becker does see AOL's share of the broadband market reaching nearly 24 percent by 2005. But that doesn't translate immediately to profits. Becker said she thinks AOL will continue to lose money on the broadband business at least that long.
Broadband isn't the only problem Becker sees at AOL. The company's narrowband business, where the bulk of its 25 million subscribers are, cannot continue to grow at the same rate, Becker said.
While AOL "is synonymous to the Internet" to many people, the company won't be able to keep signing up new customers at the same pace, Becker said. And its efforts to bring in new customers, including discounts and free trials, are driving down the average-revenue-per-user figures.
The narrowband business has also benefited in the past as network costs have declined, but Becker thinks those numbers will begin to stabilize in the future. All in all, she sees growth in the narrowband unit slowing in 2002 and actually showing drops in revenue and earnings before interest, taxes, depreciation and amortization by 2004.