AOL's broadband crusade

The AOL Time Warner online unit will launch an upgraded version of its proprietary service called AOL 8.0 Plus, accompanied by a $35 million advertising campaign. As part of the launch, the online giant has added a set of features geared toward broadband users.

The company also is selling its broadband-enhanced service to nonmembers as a standalone product called AOL for Broadband for $14.95 a month, or $23.95 a month including unlimited dial-up access. As a starter promotion, AOL will charge $9.95 a month for the standalone product until the end of the year when it reverts to $14.95.

Behind a handful of new features lies the greater message from AOL to its dial-up subscribers: If you're considering leaving the service for broadband, take us with you.

"Our business is all about giving our members what they want, and they increasingly want to move into the high-speed world," Jonathan Miller, CEO of the AOL unit, said in a statement.

AOL is the world's largest Internet service provider, but its greatest asset--its dial-up subscribers--is quickly becoming a potential liability as Internet customers make the shift from slow to fast connections. Broadband penetration into U.S. households surged 59 percent in 2002 in contrast to a 10 percent decline in narrowband connections, according to research firm Nielsen/NetRatings.

That poses a major problem for AOL, which wants to catch the broadband wave without prompting defections from its highly profitably dial-up business to cable companies, DSL (digital subscriber line) providers and archrivals Microsoft and Yahoo.

On top of its external problems, AOL faces significant internal pressure from parent AOL Time Warner to quickly solve the broadband issue. Anger continues to run high in the Time Warner side of the company over the 2001 deal that allowed the venerable media establishment to be swallowed by an Internet upstart. All the top AOL managers appointed to influential posts following the merger have left the company or moved to the side, including AOL founder Steve Case, who is dropping his role of chairman in May in exchange for a reduced role as a board member.

That has left few AOL defenders in positions of power at the highest levels of the company. At a recent industry breakfast, Ted Turner, the company's largest individual shareholder, said he would like to see AOL spun off, according to The New York Times. Although Miller has the public support of AOL Time Warner CEO Richard Parsons, he will likely have to show results quickly to quell such persistent criticisms of the unit.

The task looks to be Herculean.

AOL so far has picked up only crumbs as its share in the growing broadband pie. As of December, it had signed on 650,000 subscribers to its bundled $54.95 a month broadband service. The leading high-speed service in the United States, Comcast, boasts nearly six times that number, with 3.7 million subscribers.

AOL's slow growth in the broadband market has been matched by a recent decline in its core group of dial-up subscribers. Last quarter, the company reported that its overall subscriber rolls dropped by about 100,000 members, its first net decline in years.

That has put the company between a rock and a hard place, according to some analysts.

"AOL is primarily aiming its marketing efforts to its installed base," said David Card, an analyst at Jupiter Research. "What it has to do is avoid losing a dial-up access customer to a broadband service."

A speedier world
AOL's promotional efforts will focus on convincing people to buy its AOL for Broadband service as a standalone package, often referred to as "bring your own access" (BYOA). Currently, some 2 million subscribers get their access to the dial-up service through BYOA or from a third-party broadband provider. Now AOL is spicing up this service with features that it hopes will dazzle broadband users.

The most visible of these broadband changes will be the new welcome screen that includes snazzier graphics and video-streaming capabilities front and center. The new screen also includes different versions depending on the time of day, more links to multimedia content, and more visibility for services such as Broadband Radio@AOL and Video@AOL. Content channels such as its news area will be redesigned to include more high-bandwidth services.

These features will come on top of those found in AOL 8.0 Plus, including security such as firewall and McAfee antivirus software, heightened parental controls and the AOL Communicator advanced e-mail client.

AOL 8.0 Plus also will feature more entertainment content from AOL Time Warner's other properties, such as exclusive Web content from People and Entertainment Weekly magazines, movie previews, news clips from outlets such as ABC News, CNN and the Weather Channel, and sports highlights from the National Basketball Association, the National Football League and the National Hockey League.

AOL's "biggest challenge is they have a massively profitable dial-up user base and the economics on the broadband side, even on BYOA, aren't nearly as compelling as dial-up," said Michael Gallant, an equity analyst at CIBC World Markets. "The world is going to broadband with or without AOL."

Running with the pack
AOL is not alone in trying to offer a standalone package for broadband users. Its two main rivals, Microsoft and Yahoo, have signaled plans to launch their own standalone subscription packages as a way to lure broadband users to their services.

Earlier this week, Microsoft began courting beta testers for MSN 8.5, the latest upgrade to its Internet service, according to BetaNews.com. A Microsoft representative declined to comment on the release and would not say whether the product launch was in response to AOL's latest upgrade.

Still, Microsoft's one area of differentiation is price. MSN's BYOA product costs $9.95 a month and has been earmarked by the software giant as its main draw for broadband customers. In January, Microsoft said its stalled dial-up growth has caused it to rethink its Internet strategy to focus its efforts more closely on BYOA.

Yahoo meanwhile offered vague details of its own BYOA plans in February, but said its pricing would be "competitive" to MSN and AOL. However, the Web giant last November began testing the product, called Yahoo Plus, which included antivirus and firewall software, parental controls and extra storage, among other features.

Indeed, all three of the Net giants have pinpointed selling these subscription packages as their means of profiting off the rise in broadband. AOL has one advantage in that it will advertise heavily to the mass of 35 million members it already serves. Although more of these subscribers may consider moving over to broadband, AOL can reach them first to try to persuade them to remain loyal to the service.

Still, CIBC's Gallant questions whether AOL can justify charging more for a package that's similar to its competitors.

"I'm not so sure consumers can view the difference between an MSN and an AOL to be $5 more," Gallant said.