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AOL posts $155 million loss

America Online took it on the chin this quarter, partly because of a $24 million charge associated with its new refund policy.

America Online (AOL) today reported a multimillion-dollar second-quarter loss, in part attributable to a $24 million charge for customer refunds.

AOL, fighting a string of problems from service outages, lawsuits, and increased competition, reported a loss of $154.8 million, or $1.64 a share, for the quarter ending December 31, compared with profits of $9.5 million or 9 cents a share a year ago.

Officials agreed to settle refunds with state attorneys; they arrived at the $24 million figure through the following formula: Of the 6 million members eligible for refunds, they estimated that 15 to 20 percent would call in for refunds and 3 percent would write in. They also estimated that the average refund would be $24 per request for about 1 million requests.

AOL officials said they took the charge in this quarter because the event that led to the charge occurred in the quarter. They added that they did not expect to incur further charges from the refunds.

The company also took a $74.3 million restructuring charge for creating three separate operating units in late October--AOL Networks, AOL Studios and ANS Communications.

Excluding these charges, AOL's loss was $55 million, or 60 cents a share. Wall Street had expected the company to post a loss of 55 cents a share.

Steve Case, AOL's chairman and chief executive, said he expects the company to break even by March and turn profitable by June.

Revenues, meanwhile, jumped to $409.4 million for the quarter, up from $249.1 million a year earlier.

The company attributed the revenue increase to a jump in its subscriber base fueled by its new flat-rate pricing plans, as well as substantially increased returns from advertising and electronic commerce.

Membership climbed 1.2 million to a total of 7.8 million at the end of the quarter. North America accounted for 7.4 million subscribers, and Europe for approximately 400,000. Usage soared in December, with AOL members setting new records in daily sessions, total hours online, and average time online each day.

Bob Pittman, president and CEO of AOL Networks, said: "Our new unlimited-use pricing plans have been enthusiastically embraced by more than 80 percent of our members. We also achieved substantial gains in advertising and electronic commerce revenues--key elements in our new business strategy."

Case said the new unlimited-use pricing helped drive advertising and e-commerce, as customers spent more time shopping the electronic malls because user costs were fixed.

When AOL went to unlimited pricing, it made it clear that it would not be making money from subscriptions, but would look to pull in revenues from advertising, online sales, and attracting businesses.

Revenues from advertising and electronic commerce accounted for $40 million in the quarter, up from $13 million a year ago. And in the previous quarter, AOL generated $24 million in revenues from these two sources.

Critics have wondered if AOL's continual problems with busy signals and outages have turned off businesses looking for reliable service. Other ISPs have tried to capitalize on AOL's problems, saying they are more reliable when it comes to business solutions.

Case, while acknowledging user frustration, urged users to take the long-term view.

"People are frustrated," he told CNET. "Most people recognize we are doing everything we can. If we look at this in a historical context of AOL, we do believe the vast majority of our members do feel like we're doing everything we can to create a service that is easy to use--and useful and fun, affordable and reliable--and are going to be patient with us through these growing pains. At the same time, we're not resting on our laurels. We do believe it's a competitive market and have to constantly reinvent ourselves and recommit ourselves to meeting the needs of our customers."

Modems, or the lack thereof, have been at the heart of AOL's problems with busy signals. AOL announced today that it would be renting 50,000 new modems to bring its system to 325,000 by the end of April. Those rented modems are to be replaced with AOL's own modems by June--bringing the system up to more than 400,000 modems.

Despite a core of 400,000 modems, AOL would still have a ratio of only 1 modem to every 20 customers, compared with the industry average of 1 to 10, said Case.

And while no one provider offers enough modems for all of its members to log on at the same time, critics have said AOL's low ratios translate to constant busy signals.

Case said ISPs tend to serve people who log on for longer periods, while AOL members tend to use the service less. That has changed, however, since AOL went to unlimited pricing in December. Additional user time online and the lack of equipment to handle increased demand prompted the attorneys general to get involved.

Pittman estimated the average AOL customer will use the service from 15 to 18 hours each month after the "dust settles" and the novelty of unlimited service wears off.