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AOL subscribers, sales keep sliding

Parent company Time Warner discloses that the need for Internet speed will continue to damage America Online.

Consumer appetite for broadband Internet access will continue to damage America Online's dial-up subscriber base and dent its financial results, parent company Time Warner said in a government filing.

The disclosure was made in a document that the company filed to the U.S. Securities Exchange Commission on Monday.

In 2003, AOL lost 2.2 million dial-up subscribers, some with free promotional accounts, whom the online giant stopped counting; and many others who defected to broadband services. At the end of 2003, AOL reported 24.3 million narrowband subscribers.

The filing added that AOL's average revenue per subscriber will also decline in the future, "due to lower average pricing on broadband services than for narrowband services," the filing said.

Indeed, AOL for the past year has tried selling a version of its service to broadband users that's priced cheaper than its dial-up option. Commonly called the Bring Your Own Access (BYOA) plan, the product comes with more high-bandwidth features than the basic version, such as streaming video and audio, for people on faster connections. It's priced at $14.95 a month without Internet access, compared with AOL's $23.90 plan for narrowband service.

The disclosure highlights the tricky situation AOL faces, as more consumers disconnect their dial-up services and sign up for broadband. Cable companies and local phone giants have benefited from the consumer shift to their broadband services, usually at the expense of AOL's dial-up business.

"The new broadband service has lower average revenue per user and also lower profitability than their core dial-up product," said Mark May, an equity analyst at Kaufman Bros. "Unfortunately, the thing for AOL is it's their only alternative."

The battle between cable and Baby Bell phone companies for new broadband households has heated up, leading to faster cable download speeds or lower prices for digital subscriber line (DSL) service. This competition has prompted AOL to discontinue offering broadband access bundled with its online service, a package it used to sell for $54.95 a month. Instead, AOL has staked its future on BYOA.

Google goodness
On a more positive note, AOL showed a massive gain in its Web search revenue, which jumped from $35 million in 2002 to $200 million in 2003. The online giant has an agreement for Google to power AOL Search and share commercial search revenues.

Google sells commercial links as part of its AdWords program and gives a significant cut of these revenues to partners such as AOL. Advertisers pay Google a fee every time Web users click on the AdWords links, a similar model to that of rival Overture Services, now a subsidiary of Yahoo.

Despite solid gains from its Google partnership, AOL still witnessed a 40 percent decline in its advertising revenue in 2003. However, the Google relationship is expected to help AOL show advertising growth in 2004, executives said in January.