Internet

AOL bedeviled at broadband crossroads

AOL's revelation that subscriber numbers have dropped underscores the tough transition facing the ISP as the industry shifts from dial-up to high-speed services.

America Online's revelation this week that its subscriber numbers had dropped for the first time in years underscores the difficult transition facing the world's largest Internet service provider as the industry shifts from dial-up access to high-speed services.

Analysts have warned for more than a year that weakening demand for dial-up Internet access in the United States would likely cut deeply into subscriber growth at the AOL Time Warner division. Even so, it was a surprise when the company reported Wednesday a net loss of about 170,000 subscribers in the final three months of 2002 compared with the previous quarter.

The reversal, just months after the company took the wraps off the latest version of its Internet service, shows how badly AOL has faltered in the two years since the company acquired media giant Time Warner. In Wednesday's earnings statement, AOL Time Warner reported a loss on the year of $98.7 billion, attributed largely to noncash accounting charges affecting the AOL unit. In addition, it said Vice Chairman Ted Turner would retire from his post in May, when Steve Case is also stepping down as chairman.

The subscriber losses come as dial-up ISPs are being shunted to the sidelines by powerful cable companies and local phone outfits in the race to unleash high-speed Internet service. ISPs have responded by bolstering premium "bring your own access" packages that can be sold to customers who buy broadband access from other providers.

AOL is not alone in feeling the pinch of fading subscriber numbers.

Microsoft's MSN Internet service reported zero net subscriber growth in the fourth quarter of 2002, holding steady at 9 million subscribers despite the backing of a $350 million advertising campaign for its new MSN 8 service. The company said the lack of growth was offset by a shift to higher-paying customers as various incentive offers came to a close in the last three months of the year.

Earthlink, the third-largest ISP in the United States, has also seen declines in its dial-up business. The company this week announced massive cutbacks at the company as it moved to outsource its customer-support call centers.

Like Earthlink and MSN, America Online says it has begun to focus on improving its margins, an area that could offer a silver lining.

An AOL representative declined to comment, saying that the company had discussed the issue during a conference call with Wall Street analysts following the company's earnings report Wednesday. At that time, AOL Time Warner's Chief Financial Officer, Wayne Pace, said the company would focus on AOL's member profitability instead of member acquisition.

The number of free subscribers on the service dropped from 2.9 million in the third quarter to 2.5 million in the fourth.

"Not only does (the decline in subscribers) show the maturity of the dial-up market and AOL's inability to capitalize on the transition of its subscribers to broadband, but it may also be the result of the company getting rid of underperforming subscribers," Kaufman Bros analyst Mark May said.

News.com's Jim Hu contributed to this report.