IP Democracy: Time Warner: No Reason for Anyone To Leave AOL Now

The worst kept secret in the business world is now official. Time Warner announced this morning the “reshaping” of AOL’s access business, which calls for giving away AOL’s software, email and other products at no charge to broadband users. During a call to discuss this radical overhaul of the troubled online service, company execs stressed that they are not “abandoning” the traditional access piece of AOL’s business — they’re reshaping it so that broadband users don’t have to pay to use the full range of AOL options.

In other words, the company will continue to offer dial-up access at a price of $24.90/month as well as premium options that give even broadband users additional advantages, such as 2 gigabytes of storage. But, other than that, the company plans to watch its access revenues dwindle over the coming years.

The purpose, of course, is to stanch the flight of AOL users, most of whom have left or are leaving the service because of its proprietary, premium access-only policies. “This will remove the biggest barrier to our members staying with AOL as they move to broadband,” Time Warner President/COO Jeff Bewkes said during the call. “There’s no reason for anyone to leave AOL” now.

This strategy comes as AOL continues to hemmorrhage paid members (the service has lost almost nine million domestic members since Q3 02), a downward spiral that is damaging the unit’s ability to generate ad revenues and will result in losses soon given that acquiring new members has become unprofitable and page views are on the cusp of declining.

“If we did not change this practice we’d be giving up 30 to 40 billion page views this year,” Bewkes said, adding that this amount of traffic is equivalent to 10%, 20% and 30% of what Yahoo, MSN and Google, respectively, generate.

Hanging on to its members is crucial to AOL’s plan to pump up ad revenues. “Despite representing only 36% of all AOL unique visitors, our members drive 80% of all the page views and drive 80% of all display revenue,” Bewkes said.

Much to the surprise of some analysts, this pull-back from the premium access business won’t affect Time Warner’s earnings for 2006 because AOL will be taking out the costs of acquiring and serving those subscribers. By the end of 2007, AOL hopes to save $1 billion in operating expenses.

“We will increase our earnings next year and the year after versus what they would have been for AOL. Any expectation that this plan will entail a hit for AOL is not right,” Bewkes said, rebutting the spate of business press articles that simply subtracted AOL’s net income out of the profitablity mix to gauge the bottom-line impact of this change.

The continued servicing of narrowband customers will also become more profitable, Bewkes said. “On the cost side, the fact that we’re going to be providing narrowband activity still allows us to discontinue unprofitable subscriber acquisition and churning and retention activity that we don’t need to do.”

With the paid membership barrier to growth out of the way, AOL is “now at the point where we can believe we can compete on the web at scale,” AOL CEO Jonathan Miller said. By slowing the loss of members, and by boosting its online presence through expanded features and international expansion, AOL is poised to plunge into traffic growth, which should equate into increased ad revenues.

“Over all page views have stayed stable over the past two quarters despite letting 2 million members go,” Miller said. Non-member page views are in the range of 12 billion per quarter, “bigger than CNET’s” page views. AOL, moreover, has the fourth largest global audience with 220 million unique visitors per month.

By making AOL a more vital web option for members, the ripple effect could reverse the collapsing business. “As you have a vibrant community, it does exert gravitational pull” on other users, Bewkes said.

AOL is sending out en masse emails to members today to notify them of this change. It will also send out emails to members who have disconnected over the past two years to invite them back.

A vague plan is also in place to partner with broadband providers in order to join up marketing efforts. “Those cable and DSL broadband companies are competing vigorously for triple-play subs and the most valuable base for triple-play candidates in the United States is the AOL narrowband base. We can help them in their competition for subscribers,” Bewkes said.

Time Warner, of course, is the nation’s second largest broadband provider and AOL plans to jointly pitch services with Time Warner as well.

All in all, it’s a good move for AOL and Time Warner. More than that, this retreat from paid membership was always inevitable given that AOL never had a solid strategy in place to leverage the rise of broadband.

Once it became clear that the dial-up, Internet-on-training-wheels focus of AOL was irrelevant in the broadband era, a strategy that AOL clung to for far too long after it made any sense, the world had passed the online giant by. At that point, AOL’s only hope of survival was to jettison what had made it great in the first place and embrace a go-for-broke, ad-oriented business model premised on the open Internet.

Now, time will tell whether AOL can leverage its still-mighty marketing skills, not to mention the tremendous synergies that the rest of the Time Warner empire provides, to become a growth-oriented portal ready to compete in the booming Internet video, applications and advertising businesses.

Posted by Cynthia Brumfield on August 2, 2006 12:36 PM to IP Democracy