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Profiting from AOL's misery

Competing ISPs smell blood on online giant AOL and join class-action attorneys in signing up angry AOL members.

AOL's misery is turning into others' potential profits.

Class-action attorneys continue to descend upon a troubled America Online (AOL); at least two more suits were filed today in Seattle and Detroit. Meanwhile, other Internet service providers are taking advantage of the online king's crisis, inviting disgruntled AOL members to quit and sign up with them.

It's not like ISPs haven't done this before. Many have made cottage industries out of luring frustrated AOL members to their services, promising easy access, personalized customer service, and speedy Web access--all traditional rough spots for AOL.

Many are issuing press releases and calling members of the media in light of AOL's recent crisis to remind Netizens that AOL is not the only option out there. In fact, there are thousands of other ISPs from which to choose and several specialize in catering to beginners, the same group on which AOL focuses its marketing efforts.

For instance: PerfectData announced today that it is launching a cheap ISP for $8.30 a month. "AOL customers can use the PerfectData service and select the AOL "Bring Your Own Access'' [rate of $9.95/month]: and have unlimited access to AOL for $18.25/month," the release says.

Attorneys also are lining up to file class action suits--which can be extremely lucrative for lawyers even if they don't net large rewards per plaintiff.

Two more suits were filed in Detroit and Seattle on behalf of angry AOL members, accusing the online company knowingly offering services it couldn't deliver--namely, online access.

Four similar suits have been filed in New York, Los Angeles, and Illinois--all in one week.

Don't expect it to stop there.

Technology companies become targets for such suits when they disappoint investors with sagging stock prices. But as these companies become more mainstream, they are being targeted for disappointing consumers as well.

There's a whole category of entrepreneurial lawyers who routinely file class-action suits against companies that look like ripe targets, said Jan Vetter, a law professor at Boalt Law School at the University of California at Berkeley.

Why? Lucrative fees that typically amount to 25 to 30 percent of the total settlement in class-action suits, according to Vetter. That could mean millions and millions of dollars, and lots of attorneys competing for a piece of the pie.

But with all the attorneys jumping into the frenzy, it's unclear how the pie would get divvied up--if at all. That remains to be decided by the courts. The process promises to be cumbersome and messy, Vetter said.

AOL is no stranger to class-action suits. In fact, the company is still ironing out the details of a lawsuit that accused AOL of overcharging users and fighting another suit that alleged the way it instituted a new pricing plan was deceptive.

But the cases this week represent an issue that has the whole AOL community tied up.

Many AOL subscribers have been getting busy signals since AOL introduced an unlimited usage plan in December. Members who signed up for the new unlimited plan pay $19.95 a month for the right to log on AOL and stay on as long as they want--that is, if they can get online to begin with.

Yesterday President and CEO Steve Case sent a long letter to members apologizing for the bad service, telling them the steps AOL was taking to improve service and once again asking them to limit their online time to off-peak hours.

AOL's image problem was compounded by an internal partial outage Wednesday afternoon. AOL suffered the outage when technical problems shut down half of its system from 12:45 p.m. PT until about 4:30 p.m. PT. The problem involved a router device that manages the flow of data in a network, the company said.

"The system was able to accommodate 124,000 subscribers," an AOL spokeswoman said. Normally, AOL can accommodate about 258,000 of its 7 million subscribers simultaneously.

The spokeswoman said the outage was in no way related to skyrocketing member usage that has resulted from AOL's December price shift.

While AOL says most users are staying online only about ten minutes longer per session than they used to, many are being confronted with continual busy signals when they try to dial into the service, especially during peak hours.

AOL is working as fast as it can to increase its number of modems, the access point for dial-up users, according to David Gang, vice president of product marketing.

AOL will end up spending $350 million now through June to boost the network, a plan that includes adding 30,000 modems a month. The goal, is to allow 400,000 of AOL's 8 million customers to log on at once: the system would allow 350,000 dial-up users and another 50,000 people who log onto AOL from another ISP.

But AOL's assurances that things will get better aren't pacifying all its users.

On Monday, suits were filed in New York State Supreme Court and at the Superior Court of the state of California. The Los Angeles suit seeks damages, claiming America Online acted with "malice" and "fraud"--in violation of the California Consumers Legal Remedies Act--by not putting enough hardware in place to handle the additional traffic before it implemented the new pricing plan.

A similar suit also has been filed in Illinois.

News of the suits surfaced only one day after AOL was in court trying to close another suit that alleged that AOL had overcharged its members.

AOL settled the case when it agreed in September to give all AOL members one free hour of service and to give members who had spent at least $300 on the service an extra hour for every $300. AOL distributed the free hours before its new pricing took effect, according to the company.

AOL had also agreed to pay members who had left the service the equivalent of the hourly fee--$2.95--for every $300 they had spent on AOL. Those members had until November 30 to file claims with AOL.

AOL had set aside $500,000 to pay those claims and $2.75 million to pay its opponents' attorneys. Yesterday a judge agreed to transfer $300,000 of the money slated for attorneys fees to the fund for heavy users.

If any money is left over from the fund, AOL has said it will donate it to charity. San Francisco Superior Court Judge James Robertson said he would oversee the distribution of the funds.

Monday AOL filed a motion to dismiss yet another suit filed by Stephen DiLorenzo in New York Supreme Court. The user said AOL switched subscribers from their $9.95 per month pricing plan the $19.95 unlimited access plan without giving them fair notice.

AOL also came under fire for that pricing plan from 19 attorneys general. It settled the case with those states, agreeing to go back and offer the new plan as an option to as many members as possible.

Reuters news service contributed to this report.