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The empire strikes back

America Online: The empire strikes back

If you're reading this online, AOL probably doesn't have you in its sights right now.

Without any question, America Online (AOL), with 7 million members, is the giant of online services. But like most giants, it's always hungry.

That's why AOL is betting on the great promise of the online world: that the tens of millions of people who have not yet logged on will eventually do so--and, when they do, they'll want a big service with a big name that will make it easy for them to venture into cyberspace.

Jupiter Communications predicts massive online growth, estimating that worldwide

users will triple by the year 2000, from 23.4 million households in 1996 to 66.6 million in 2000.

Getting those consumers, however, requires money. And not everyone is convinced that AOL's strategy will pay off, particularly when it is getting so expensive to compete.

AOL has indeed become the best-known online service, but getting there cost it $300 million in promotions this year alone. "They secured their position at a phenomenal cost," said David Simons, managing director of money management research firm Digital Video Investments.

Simons, who points to the slowdown in growth of new computer buyers, questions whether the online market will boom fast enough for AOL. "The growth rate is clearly slowing."

AOL has also chosen to maintain a private network, rather than moving to the World Wide Web along with its potentially biggest competitor, Microsoft Network. It also is relying on the uncertain future of online advertising and other business models to make up for the money it could lose as the service shifts from hourly charges to less lucrative flat-rate pricing.

The new pricing is already causing problems. After having relied on its hourly billing for much-needed revenue, AOL suddenly is faced with the scenario of people clogging its network--without bringing in any more money. AOL had to spend money to handle the additional usage and last month struck a $340 million deal with BBN to expand its dial-up network.

Chairman and CEO Steve Case said AOL would make up potentially lost revenue by relying on funds from advertising, online commerce, merchandising, and renting out its network during off-peak hours. But nobody knows yet whether those will be real money makers, and unlike MSN, AOL does not have the cushion of a parent company to absorb losses.

On top of everything, AOL has come under fire in recent weeks for the way it implemented its pricing changes. Instead of asking subscribers if they wanted unlimited pricing, the service is automatically moving members to the new rate. AOL has come under fire from 17 states for the change, which the states say violate several "negative option" laws.

Even if AOL succeeds in getting new customers, they'll still have the same problem they've always had: keeping them.

People have left in part because they could find cheaper Internet access through basic Internet service providers. Now that AOL is offering the same flat-rate pricing as ISPs, it has to do the same thing that all other networks are doing--build a strong service with great content. 

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