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$100 million gamble on AOL

Tel-Save Holdings says it signed up about 23,000 customers for long distance service in a 24-hour promotion on America Online.

Jeff Pelline Staff Writer, CNET News.com
Jeff Pelline is editor of CNET News.com. Jeff promises to buy a Toyota Prius once hybrid cars are allowed in the carpool lane with solo drivers.
Jeff Pelline
3 min read
Tel-Save Holdings said it signed up about 27,000 phone lines for 23,000 long distance customers in a 24-hour promotion on America Online (AOL) yesterday, and it called the results "better than expected."

As reported earlier, the ambitious program to test-market its phone service to the 10 million subscribers of AOL essentially is a $100 million bet on the power of e-commerce.

In February, AOL received a $100 million payment from Tel-Save for the right to market its long distance phone service on the No. 1 online service. The payment represented the largest single lump sum the company had received outside of subscriber fees.

For AOL, it was a way to raise needed cash and tap new forms of revenue in the wake of flat-rate pricing. For Tel-Save, it was an opportunity for a little-known telecommunications company to expand quickly and compete against the likes of MCI, Sprint, and WorldCom under industry deregulation. Now, it's time to see if the plan will justify the investment.

Such deals have also become a sensitive matter for AOL, which has drawn fire for similar types of moneymaking strategies. Although such deals provide strong revenue sources, members of the leading online service have become wary of them, fearing that their privacy will be breached if their names and other information are disclosed in the marketing process.

In July, the company agreed to drop plans to give out members' telephone numbers to its business partners after many users became incensed.

Daniel Borislow, chief executive of Tel-Save, said that policy never would have applied to its deal with AOL. Instead, his campaign will saturate AOL's service with advertising, providing special signup procedures for members who choose to click through the banners.

The telco is advertising flat-rate calling as low as 9 cents per minute, typically lower than many calling plans. The rate is 10 cents per minute, plus a $1 monthly fee, for non-AOL subscribers. Users sign up online with their credit cards, are billed online, and can view their bills online. Calls are handled on AT&T-leased lines.

Online registration and billing lowers the distribution and marketing costs for telcos, so the idea could catch on, analysts said. Under deregulation, the telcos are in a cutthroat battle to sign up new customers, so the AOL deal with Tel-Save will be watched closely. Internet directories and online services, always looking for a new source of money, will be just as interested in the results.

Borislow predicted on Wednesday that more than 18,000 people would sign up during the first 24 hours alone. This one-day national advertising blitz is in the final phase of testing before a full-scale ad campaign is rolled out in mid-January. In the end, Tel-Save expects to recoup its $100 million and more. (The $100 million, structured more as a loan, essentially is an advance on the commissions the company will owe to AOL on the customers who are signed up.)

Tel-Save's stock has already risen from the deal. Its stock has risen from about 13 to more than 18 since the deal was announced in February. In August, Tel-Save disclosed that its deal will result in some near-term charges: about $26 million, $25 million, and $12 million, respectively, for the next three quarters. Now Wall Street will be watching to see how quickly Tel-Save can generate revenue from the AOL deal.

AOL has received more than $225 million from companies such as Tel-Save, CUC International, and others. Just today, Barnes & Noble signed a deal to pay America Online $40 million to be the exclusive bookseller on the online service.

Wall Street has been bullish on AOL, largely because of such deals. They not only generate revenue, but they also underscore the potential strengths of the AOL network.