IP Democracy: AOL to Throw in Towel on Subscription Service?
The Wall Street Journal’s Matthew Karnitschnig reports this morning something that has been inevitable for years: AOL is contemplating the end of its subscription service. (Reuters write-up of WSJ piece here.) AOL CEO Jonathan Miller reportedly presented a plan to parent Time Warner’s board last week that calls for ending the premium option for customers who access AOL via broadband, thus ending a service that revolutionized the Internet in the 90s but suffers from continuing loss in the broadband era. Subscribers who have dial-up service would still have to pay.
The company estimates that a third of its 18.6 million customers use broadband, and the loss of these customers’ payments could translate into a $2 billion per year revenue loss. But the company calculates, quite correctly in my view, that these folks are going to disappear anyway so it’s better to hang on to them and generate ad revenue from their continued patronage rather than lose them altogether.
A look at AOL’s slipping subscriber counts bears this out. As the table below demonstrates, AOL has been losing paid subscribers at a quickening pace since the fourth quarter of 2002. Over the past four quarters alone, the service has lost 3.056 million paid customers — at this rate, AOL is out of the premium subscription business altogether in under six years.
| Total U.S. AOL Subs. | |||
| (in 000s) | |||
| Net | |||
| Subs. | Change | Change | |
| 4Q 02 | 26,481 | -176 | -1% |
| 1Q 03 | 26,192 | -289 | -1% |
| 2Q 03 | 25,348 | -846 | -3% |
| 3Q 03 | 24,658 | -690 | -3% |
| 4Q 03 | 24,259 | -399 | -2% |
| 1Q 04 | 24,022 | -237 | -1% |
| 2Q 04 | 23,354 | -668 | -3% |
| 3Q 04 | 22,708 | -646 | -3% |
| 4Q 04 | 22,204 | -504 | -2% |
| 1Q 05 | 21,696 | -508 | -2% |
| 2Q 05 | 20,778 | -918 | -4% |
| 3Q 05 | 20,100 | -678 | -3% |
| 4Q 05 | 19,475 | -625 | -3% |
| 1Q06 | 18,640 | -835 | -4% |
In all probability, however, AOL’s subscriber loss will only continue to accelerate. Moreover, at a certain point, and AOL is probably pretty close to this, the company is probably losing money on its subscription business.
In what is probably a bit of corporate delusion, AOL is hoping to double its ad revenues to compensate for the loss of the premium subscription revenues. While ad revenues have been growing as AOL pushes more of its content and services to an open web-based model, ad growth is unlikely to cover even a fraction of this revenue loss. As the table below shows, ad revenues for the online unit inched up by only 3%, or $13 million, in the most recent quarter. That’s down from a 16% or $51 million rise in ad revenue during the preceding quarter.
| Total AOL Ad Revenue | ||
| (in mil.) | ||
| $ Amount | $ Change | % Change |
| $ 179 | $ (45) | -20% |
| $ 178 | $ (1) | -1% |
| $ 204 | $ 26 | 15% |
| $ 214 | $ 10 | 5% |
| $ 221 | $ 7 | 3% |
| $ 257 | $ 36 | 16% |
| $ 313 | $ 56 | 22% |
| $ 311 | $ (2) | -1% |
| $ 320 | $ 9 | 3% |
| $ 328 | $ 8 | 3% |
| $ 379 | $ 51 | 16% |
| $ 392 | $ 13 | 3% |
Posted by Cynthia Brumfield on July 6, 2006 8:20 AM to IP Democracy