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AOL's broadband blues

CNET News.com's Evan Hansen explains why AOL's plan to harness broadband threatens to leave it on the wrong side of the connection.

Last month, I became a statistic in America Online's turnaround plan: They cut off my free subscription. I immediately noticed the $23.90 charge on my credit card bill--the highest rate in the country for consumer dial-up Internet access--and called to complain. After tussling with three different AOL representatives I was finally able to have the charge and the account canceled.

Goodbye, AOL.

I'm not the only one closing an account with the world's largest dial-up Internet service provider. In the past year, 2 million U.S. subscribers have logged off the service.

AOL says many of those losses come from clearing out freeloaders like me, an argument that appears to hold water. Subscriber declines have yet to cut into subscriber revenue, which was up 4 percent for the period partly on gains in Europe.

But even that can't disguise the fact that premium dial-up service is a dying business, a victim to broadband and discounters.

AOL's problems have sparked dire--but as of yet--unsubstantiated rumors about its future. The German newspaper Suddeutsche Zeitung last week reported that Dick Parsons, CEO of AOL's parent company Time Warner, discussed a possible merger or joint venture involving AOL with executives at Deutsche Telecom's T-Online Internet subsidiary.

But there is no denying that U.S. dial-up ISPs have been hemorrhaging subscribers to broadband over the past three years, a trend that's accelerating.
Both companies deny the report. But there is no denying that U.S. dial-up ISPs are hemorrhaging subscribers to broadband as prices for high-speed Net access fall to within striking distance of AOL's $23.90 premium service price, a trend that's accelerating. Subscribers to Comcast's cable broadband service can get the first six months for $19.99. First-time buyers of SBC Communications' digital subscriber line service pay just $26.95 a month, with certain restrictions. Where rock-bottom broadband prices are still too high, consumers are fleeing premium plans to bargain services such as Juno Online's $9.95 a month dial-up offering.

AOL won't admit the game is over, but the company can't easily build or rent its own broadband network at competitive rates. That's because most cable and telephone companies have opted to market high-speed Net access themselves. AOL charges $54.95 for cable broadband service. That compares with industry standard rates of $45 to $50 a month. And it hasn't been able to win strong support from its most obvious partner, Time Warner Cable's broadband division, Road Runner.

AOL responds
AOL's problems are legion, including a plunge in advertising revenue, an ongoing federal investigation into its accounting practices and the lingering effects of a bitter corporate power struggle with executives at parent Time Warner, whose board threw out AOL managers from the top ranks and stripped AOL from the company's moniker.

Of all its problems, however, the biggest is subscriber losses.

Things may have finally hit bottom on the advertising side, thanks in part to AOL's partnership with Google. That deal has brought easy pickings in the form of search-engine marketing dollars. A similar deal between Overture Services and MSN helped the Microsoft division turn its first profit, the software giant reported last week.

Although advertising is up, there are no similar signs of optimism for AOL's declining membership rolls--a problem that's affecting all of the major dial-up ISPs, including MSN and EarthLink.

AOL's main response to the changing market has been defensive: It is preparing a new discount service under its Netscape brand to try to catch budget-minded customers on their way out the door. And it's created a package of content and services for customers who drop their dial-up plan for broadband, called "Bring Your Own Access," for $14.95 a month.

The company can't easily build or rent its own broadband network at competitive rates because most cable and telephone companies have opted to market high-speed Net access themselves.
That, as well as new broadband sign-ups, has accounted for some 340,000 subscribers in the third quarter to help offset the millions going the other way. Its broadband now counts 2.6 million subscribers total. That's not bad. SBC added 366,000 new DSL subscribers in the same period. Still, AOL's numbers show a sobering disparity.

AOL is hoping it can eventually stanch the bleeding by adding value through extras such as parental controls, music, sports and magazine exclusives, e-mail, instant messaging and security, among other things. The idea behind much of this is to harness the advantages of broadband connections consumers will likely purchase elsewhere.

AOL now offers members exclusive access to live performances by some top music stars. It recently launched an online sports news video program in conjunction with Disney's ESPN. And members can read articles from Time Warner magazines that are no longer offered freely on the Web.

In a sign of rapprochement between AOL and Time Warner business heads, the two sides last week launched a new AOL food channel featuring recipes and other content from magazines such as Cooking Light. This is the kind of cooperation that should have happened years ago between the two companies when they first joined forces. It still promises powerful "synergies," to use a largely discredited word that was once a favorite among ex-AOL executives such as Bob Pittman. But will it be too little, too late?

AOL is looking for reinvention as a purveyor of paid content that's not all that different from premium service plans being developed by rivals such as Microsoft's MSN, Yahoo and multimedia outlet Real Networks.

I can't think of a better strategy for the company to pursue. And that's just the problem. AOL's biggest asset is its role as online gatekeeper for millions of customers. Even as critics assail the company for losing direction, it is set to pull in more than $1 billion in free cash flow this year.

But all the content in Time Warner's deep chest can't replace dominance of the basic connection used by most Americans to trade e-mail, chat, read the news and shop online. It's too soon to tell if AOL can build a compelling new service around bandwidth sold by other people. Even if it does, the service will most likely live on as a shadow of its former self.