AOL, already the world's largest Internet service, with 27 million subscribers, could potentially raise rates by a couple of bucks without fearing a major customer exodus, Merrill Lynch Internet analyst Henry Blodget wrote in a report Wednesday.
Last week, ING Barings analyst Youssef Squali said that given AOL's dominant Internet brand, the company could afford to raise subscription fees without losing too many subscribers.
At a time when online advertising has grown soft nearly across the board, a $2 monthly increase per subscriber could generate about $365 million in revenue in 2001, according to Blodget.
AOL Time Warner has scheduled an analyst presentation for Jan. 31 but has made no comments on whether it will raise its AOL rates. Neither the company nor Blodget returned calls for comment.
In April 1998, AOL raised its fees to $21.95 from $19.95 a month for unlimited access; its subscriber rate still chugged higher.
Consumer advocates say that a potential rate increase for Internet access is a foreboding sign of AOL Time Warner's monopoly in the marketplace.
"If they raise rates, it's a sign of their monopoly power. They've got such a big share of the marketplace they can get away with it," said Ed Mierzwinski, consumer program director for the U.S. Public Information Resource Group.
Channeling the cable industry?
In addition, some critics said AOL Time Warner may be taking a page from the cable industry. According to a recent report from the Federal Communications Commission, cable rates rose faster than inflation from June 1999 to June 2000.
"Cable companies including Time Warner continually sock it to their customers (with rate hikes), and now that AOL has joined the cable club, it would not be surprising for them to act more like Time Warner than AOL," said Jeff Chester, executive director for the Center for Media Education, a Washington, D.C.-based Internet policy advocacy group.
For AOL to raise rates would be a natural step--along with staff cutbacks--in the company's mission to reach $11 billion in cash flow in the next year.
"AOL users have to be forewarned that (Chairman) Steve Case is on a mission now to generate increased revenues to support this megamedia conglomerate's mass holdings," said Chester, adding that the price of the merger will be passed on to consumers.
"AOL users should be looking very critically at any potential increase in rates. They should ask themselves, 'Am I paying for Net access, or am I paying to keep Bugs and Daffy happy?'" said Chester, whose group fought to impose restrictions on the AOL-Time Warner merger.
Competitors may benefit
Although consumers may feel the pinch, especially if the economy continues to sour, a rate increase will most likely receive a favorable reception by Wall Street and AOL Time Warner's competitors.
"Clearly we haven't been matching their prices, and until now our own prices have been significantly lower across the board," said Gary Baker, a spokesman for Juno Online Services, a rival Internet service provider that offers free and for-fee services. "That is not to say we won't change prices. We are very focused on increasing our revenue stream."
He said Juno had 3.7 million subscribers as of September 2000, with about 3 million using its free, advertising-supported service. Juno charges $14.95 for its flat-rate service.
"While two-thirds of our revenue stream comes from our billable subscribers, we would love to increase that number," Baker said. "But as with any service, the more you charge, the less people will potentially be interested in the service."
With the recent demise of the major free Internet access services, many analysts see rate hikes as a necessary evil to help ISPs move toward profitability.
"It would clearly have a favorable impact on other ISPs in terms of their objective of meeting their expectations for profitability," said Phil Leigh, an analyst at investment bank Raymond James. "There has been an increasing evident trend among Internet companies for charging for services that used to be free. That might be why we are seeing a strengthening in Internet stocks as investors see their sensitivity toward the bottom line."
Leigh added that consumers will have different tolerance levels for fee increases and are likely to be more willing to accept incremental fees for new services rather than a flat fee increase. Still, AOL Time Warner may feel it has little to worry about, said Leigh, with its continued ability to draw new subscribers. The company said Tuesday that its subscriber numbers hit 27 million.
Some subscribers will surely object to rate hikes, but the suggestion doesn't bother others.
"I don't care how much it will cost...It works--all the time," said Sylvia Paull, a high-tech public relations specialist in the San Francisco Bay Area who subscribes to the service.