America Online, long content to rule the Web world from its ivory tower, is lowering the drawbridge.
Since its inception, the world’s largest Internet service provider has used its proprietary software as a gateway to its e-mail, busy chat rooms and exclusive features from sister properties such as the popular magazines People and Sports Illustrated.
The problem for the Time Warner Inc. unit is that it may be driving away customers seeking cheaper, more customized services by basing its flagship service on an isolationist model accessible only to members who pay $23.95 a month.
Now, ahead of a critical board meeting in April, AOL Chief Executive Jonathan Miller has to convince Time Warner that its online unit can recover from disappointing advertising sales and subscriber defections of 2.2 million, or about 10 percent, in 2003 alone.
AOL’s woes have prompted several New York newspapers to write stories suggesting it may be up for sale, although analysts say such a move would be ill-timed before the unit has another chance to improve.
Until now, AOL’s strategy has been to use exclusive features to lure subscribers into paying more -- compared with other monthly fees of $10 to $15 -- for its entire basket of services, much in the way HBO managed to attract subscribers with “The Sopranos” and “Sex in the City.”
It has launched AOL products, including a high-speed program that requires consumers to provide their own access, and others that target bargain hunters, kids and Hispanics.
But by relying more on the open framework of the Web, analysts say AOL can attract subscribers by selling, piecemeal, services like e-mail or chat rooms and creating a new model around providing users with “digital storage lockers” for videos, photos and music.
“It’s about challenging all the sacred cows,” said Miller, who joined the online unit at its nadir in late 2002, when its accounting practices became the subject of two federal investigations. “AOL was built on a proprietary system. The move is unquestionably toward standardization,” he said.
Analysts said its closed system and unique software has prevented it from responding to a changing market of users, who are inclined to buy fragments of services from ISPs rather than pay a higher monthly fee for functions they may not want.
“Customers are asking for control,” said independent analyst Gary Arlen.
Such a move could help it stay in step or even surpass rivals Yahoo Inc. and Microsoft Corp.’s MSN service, both of which have organized their businesses in similar ways.
“If you’re not willing to be flexible with the market, you’re going to be an island at some point,” said Paul Kim, an analyst at Tradition Asiel Securities Inc. in New York. “Yahoo’s going to eat your lunch.”
Miller’s proposed solutions come amid a re-evaluation of the unit’s standing. Considered the Time Warner family’s stepchild since the 2001 merger, AOL has been blamed for wiping out $200 billion in shareholder value after failing to live up to the promise of profitably merging new media with old.
The CEO needs to find new lines of revenues quickly to assure long-term health, Time Warner executives have said. Trimming costs to maintain profits growth can only go so far.
AOL’s progress is being monitored “under a microscope” a Time Warner spokeswoman said this week, following reports that Time Warner may be exploring a sale of the unit to Microsoft.
Microsoft, which faces stringent antitrust measures in the European Union, is unlikely to make any major acquisitions for the time being, analysts have said. Time Warner last week said the reports were simply untrue.
Networked office for life
AOL executives have talked up plans to offer online radio stations, music, photos and video clips to any number of devices by the end of the year.
It signed a deal with network hardware company D-Link to extend its reach into the living room, letting subscribers wirelessly send 175 online radio stations to home stereo equipment and photos from online accounts to television sets.
AOL also has tested its service with Nokia Corp.
It “allows people who aren’t members to sample AOL content and services,” said Peter Ashkin, executive vice president of Advanced Devices at AOL.
Someday, Miller said, he hoped subscribers will rely on AOL to store everything from videos of a baby’s first steps to summer vacation photos.
“It’s a philosophy that you want a centricity to your connected life,” he said. “We want to deliver it (digital media) in as broad a way as we can, configured for the device.”
Such services will be critical as consumers snap up digital cameras and music players. “Digital asset management is going to be a more important service as more of their life becomes digital,” Forrester Research analyst Charlene Li said. “They could easily have that on AOL.”
