The walls surrounding America Online Inc.’s
well-manicured gardens are crumbling. In a move both risky and essential,
AOL is abandoning its strategy of exclusivity and will free much of its
music, sports and other programming to non-subscribers in hopes of boosting
ad sales.
The decision could help the company counter declining subscriptions as
Internet users move to high-speed connections. At least that’s the plan.
The danger is that the bold new strategy will instead accelerate the erosion
of AOL’s core revenue source.
To begin with, the change pits AOL against big guns Yahoo Inc. and Microsoft
Corp., which in turn are looking over their shoulder wondering what search
leader Google Inc. will do next.
“AOL is left looking like the race car in a race that nobody wants to run in
anymore,” said Rob Enderle, an industry analyst in San Jose, Calif. “AOL’s
dead as it exists. It has to find a way to become relevant again.”
Although AOL executives insist the company’s short-term prospects are
healthy, they agree they ultimately must rely less on their legacy
subscription business. With the recent renaissance in online advertising,
AOL wants a bigger share of those dollars – and to do that, it must open its
members-only “walled gardens” to the public. Not that it’s abandoning the
subscriptions: It’s all about a better balance.
“Having two revenue streams inoculates you from the vagaries of the
industry,” said Ted Leonsis, vice chairman in charge of AOL’s new ad-driven
audiences division. “We could have an advertising recession, and that would
be really bad if you were just an advertising-driven company.”
Leonsis insists the change is less fundamental than it seems, given that AOL
already has thriving ‘untethered’ properties it acquired, including
Moviefone and MapQuest. Leonsis estimates AOL will need to grow its monthly
audience of unique visitors, to all the sites it owns, by only 25 percent
within five years.
In fact, AOL’s sprawling headquarters outside Washington, D.C., shows little
sign of change save for a new triangular logo that now points to the right,
or forward, rather than up. Employees change supervisors, not offices. The
mission statement in the lobby remains a legacy of ousted chief executive
Steve Case.
AOL, launched in 1989, has thrived on selling Internet access plus exclusive
programming in one easy-to-use software package that fits on a disc. It’s
how millions first got onto the Internet.
But as Internet users matured, they often dumped AOL along with their
dial-up connections. AOL responded by setting up a broadband division, first
focusing on a packaged offering similar to dial-up and later concentrating
on a programming-only plan called “bring your own access.”
The company now has nearly 5 million broadband subscribers, up from about 3
million a year ago. But overall the number of U.S. subscribers dropped to 23
million in September, down from a peak of 27 million two years earlier. For
many, exclusive programming alone wasn’t worth the $14.95 monthly fee in
addition to DSL or cable service.
Nonetheless, AOL remains committed to broadband and says it considers the
free access to programming a natural outgrowth.
“We’ve built that new business, and now we have an opportunity to focus on
creating a different, a new balance, a better balance” between subscription
and advertising, said Kevin Conroy, AOL’s executive vice president for Web
brands.
True, AOL has a late start compared with Yahoo and Microsoft’s MSN, but
executives say the shift couldn’t have occurred any sooner.
For one thing, AOL wasn’t in the business of producing content until a few
years ago. It used to subcontract that work to outside companies such as
iVillage, which sold the ads. Since then, AOL has built not only an in-house
content-development team but also an advertising sales network to capitalize
on it.
AOL has also upgraded its technology to make it more compatible with the
outside world. It has gradually switched from a proprietary programming
language, known as “Rainman,” to the hypertext markup language that powers
the Web at large. It also has standardized ad formats; no longer would
Moviefone and Netscape, say, have different rules on how big ads were and
where they were placed.
Last month, chief executive Jonathan Miller reorganized the company,
eliminating 700 jobs, to create distinct access and audiences units: The
former will focus on retaining subscribers while the latter tries to grow
audience through free programming.
Executives have a rough idea of what to make free and what to keep
exclusive. Extensive research over the past two years showed that
subscribers were willing to pay for safety and security. Last month, AOL
offered new members-only software that incorporates free antivirus, firewall
and other protections.
A kids area called KOL, a teens offering called Red and a Spanish-language
service were also deemed popular and worth the subscription price.
Just about everything else is fair game for the AOL.com reincarnation,
expected for next year. News and music are among features not deemed
essential hooks for subscribers but instead features worth taking to a
broader audience.
AOL also will consider a hybrid: A concert, for instance, might be offered
live to members, with highlights offered on a delayed basis for free. Or AOL
may create a la carte plans: Instead of $14.95 for all-you-can-eat, how
about something cheaper for the kids section only?
The company is also considering free Web-based e-mail, though accounts are
not likely to carry the “aol .com” domain and the interface may display ads
more prominently.
“It’s long overdue,” Forrester Research analyst Charlene Li said of the new
strategy. But she warns that anything made free risks a loss of paid
customers. The new strategy counts on bringing back former customers, but
the most skeptical of AOL tend to be the most lucrative Internet users.
“If I want entertainment, I know of special places to go. I’ll go to Barnes
& Noble for books and DVDs. You don’t need AOL to guide you,” said David
Davis, a Fairfax, Va., software architect who dropped AOL last month.
Mike Joachim, a technical writer in Pelham, Ala., said he might give a free
AOL.com portal a try but he doubts anything will shatter his perception of
the Internet service provider as “a wonderful ISP for newbies.”
Executives insist they won’t be starting from scratch, given AOL’s already
strong free brands including the instant-messaging programs AIM and ICQ. And
because advertising has a higher profit margin than subscriptions, Miller
said, the company’s profitability can grow even if revenues don’t.
Jonathan Gaw, research manager at IDC, said AOL has strong assets to work
with, but remains in a bind.
The latest reincarnation, he said, shows all signs of “a company that is
struggling to stay on top of a rolling log.”
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