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New rates may affect AOL earnings

While the online giant has seen record customer retention rates of late, it is anticipating difficult times in moving to its new pricing plan.

SAN FRANCISCO--While America Online has seen record customer retention rates of late, the online giant is expecting to face a few difficult months as it makes the transition to its new pricing plan, which started earlier this month.

Len Leader, AOL's chief financial officer, today said that the company's third quarter will be affected by the new plan, which institutes an increase in the monthly rate for unlimited service to $21.95. The new plan went into effect in the April 1 billing cycle.

AOL's move made it one of the first Internet service providers to abandon the industry standard, all-you-can eat rate of $19.95 a month.

Leader, who spoke during a Hambrecht & Quist technology conference here, said AOL's acquisition of CompuServe will begin to have an effect on the company's earnings in the third quarter, but he noted that the full benefits of the deal should be realized during the fourth quarter.

AOL's cash balance in the third quarter will get a substantial boost from the $175 million sale of the company's network division, ANS Communications, to WorldCom, as part of a three-way transaction that also involved CompuServe. AOL acquired CompuServe's interactive services division from WorldCom.

The recent sale of AOL's share in a joint venture also will contribute to a larger cash balance for the company, Leader said.

AOL's marketing costs as a percentage of revenues have declined during the past year. Spending on marketing fell to 16 percent during the second quarter ended December 31, from 37 percent recorded a year ago.

Based on a consensus of analysts' estimates, AOL is expected to generate $682 million in revenues during the third quarter, up 52 percent from a year ago. Revenues from the company's online service are expected to reach $567 million--a 49 percent increase over year-ago figures.

In February, the company announced a restructuring to create two new units--AOL Interactive Services and CompuServe Interactive Services. AOL also formed an investment unit but has yet to announce any new deals, according to Leader.

He declined to comment on speculation that the company has been looking into acquiring NetChannel, an Internet service provider via TV.

Leader said that AOL, which encountered serious trouble in handling the surge in usage that resulted from its move to unlimited flat-rate pricing, now has enough capacity to handle 700,000 members on the system simultaneously. It now sees more than 600,000 simultaneous users.

Other quick statistics Leader outlined included an increase in daily usage by its members to an average of 50 minutes a day, up from 40 minutes in December. He said stock quotes now are being checked 75 million times a day by AOL members, up from 22 million a day a year earlier. Also, he said, women currently account for 52 percent of AOL's users, up from 16 percent recorded three years ago.

Leader cited the boom in the demand for low-cost computers and desire to use email as two key drivers of AOL's increased membership rates.