Back to Basics, On to Broadband for AOL

NEW YORK — America Online executives unveiled plans to turn around the beleaguered ISP’s fortunes during an analyst meeting Tuesday, including a new “bring your own” broadband offering and a new anti-virus service.

During a day of presentations to Wall Street analysts, which included
plenty of “straight talk” from executives about AOL’s revenue woes, the
world’s largest ISP also warned that advertising and e-commerce revenues
would fall by between 40 percent and 50 percent in 2003.

AOL’s Chief Executive Jon Miller said the drop was due to $500 million
worth of long-term advertising deals left over from the dot-com boom that
had run their course. “They are not likely to return,” he said. Despite the
drop in ad and e-commerce revenues forecast for 2003, the company’s overall
forecast for the year is essentially flat.

The company stuck to its outlook for full-year 2002 revenues ranging
between $8.8 billion and $9 billion. Advertising and commerce revenues are
expected to be between $1.5 billion and $1.6 billion. It expects cash
earnings, or EBITDA, to total between $1.7 billion and $1.8 billion,
trending toward the high end of that range.

The news about its outlook came during a day in which AOL and AOL Time
Warner executives talked about how humbling the past two
years have been for the company. As it became clear that the much-touted
synergies of
the AOL Time Warner marriage were not materializing, investors
pummeled the company’s shares for most of the year. In addition, AOL is
still facing regulatory probes over past accounting on ad deals, all while
struggling through a difficult advertising recession.

In a nod to the difficulties the company faces in migrating its dial-up
base to less profitable broadband subscribers and finding carriage deals
with other access providers, Lisa Hook, the president of AOL Broadband
division, called broadband access “an opportunity for the company, not a
threat.”

AOL is now actively pursuing broadband growth with a two-pronged
approach, Hook said. One part is a focus on the AOL 8.0 product. The other
is to expand its distribution arrangements with cable and DSL providers in
order to build on the company’s 2.7 million broadband subscriber base (it counts 4 million in all including AOL subscribers on “bring your own” access).

It is also offering a new “bring your own access” approach to offering
the AOL service to customers who use another access provider’s network. For
$14.95 a month, the company is offering its AOL service, including its new
Instant Messaging client, which is now the home for an integrated menu of
multi-media services such as drag-and-drop pictures in e-mail and buddy
lists integrated with e-mail.

Don Logan, chairman of AOL Time Warner’s media and communications group,
also announced that AOL would be getting an infusion of content from
publications of Time Warner, its corporate sibling. The company said Time,
Inc. editors would work with AOL to integrate content from magazines such as
People, Real Simple, Parenting, Teen People and
Coastal Living.

In addition, AOL subscribers will be able to get access to CNN’s video
news service, which usually costs about $4.95 a month for the video streams,
Logan said. AOL has already begun rolling out exclusive
first-looks-and-listens from its music, film and television divisions as a
way to entice new broadband subscribers.

Company officials were quick to point out that AOL’s commitment to its
dial-up base, which makes up the vast majority of its 35 million-member
base, was not getting lost in its new broadband strategy. Indeed, it is
AOL’s ongoing commitment to customer relations and improving its experience
for narrowband members that will ensure they stick with AOL for broadband
service, said Ted Leonsis, a vice chairman of AOL who now heads up the
interactive services group.

Since Miller took the reins of AOL last March in one of a series of
management shake-ups at the ISP, he has moved quickly to address the
company’s commerce and advertising revenues, which have suffered the most in
the two-year technology/advertising recession that began when the dot-com
bubble burst. In the third quarter alone those revenues fell by 48 percent.

Among new e-commerce initiatives unveiled Tuesday was a new anti-virus
service AOL is offering its members in conjunction with Network Associates
. The two-part offering includes a basic service that
delivers free virus scans of all e-mails coming into users’ inboxes. The
second component, AOL executives said, is a premium subscription that
extends the virus protection features to the user’s PC. Pricing details are
expected to be unveiled in the first half of next year when the product
launches.

A persistent question before AOL is whether exclusive content offers are
enough to help it improve gross margins on broadband customers, which some
industry analysts peg at around
20 to 25 percent, way below the industry average even before factoring
marketing and operating costs.

Despite the questions about the costs involved with striking more
carriage deals for broadband services, Miller and Hook remained upbeat but
prudent about their goals. During a Q&A portion of the AOL presentation,
Miller reckoned that by 2005, the company’s broadband base might reasonably
have grown to just under double digits.

In unusually blunt comments throughout the AOL Day, Miller described a
company that had completed a months long strategic review to figure
out how to turn around a dramatic drop in ad revenue, an erosion of investor
confidence and a slight ebbing of dial-up subscribers to other broadband
providers.

“We didn’t innovate. Customer satisfaction was off its historic highs”
and “we missed the first wave of broadband,” he told the audience of
analysts and press at the Sheraton Hotel in Manhattan. But just because AOL
missed the first wave of broadband growth, “doesn’t mean we are out of the
game,” Miller said.

When it comes to innovating new products and coming up with approaches to
taking a cut of
transactions between members and vendors, the former head of information
services at USA Interactive is in familiar territory. He
has shepherded new services for incremental fees that target both the fast
end and slow end of AOL’s base, such as small business Web hosting services
for broadband subscribers and by-the-hour, pre-paid cards for attracting
members to cheaper dial-up rates.

AOL also said it is getting out of the merchandising business that had
been connected to its use of pop-up ads, which it recently decided to
discontinue.

Other e-commerce features include taking a cut of tickets sold online
through a partnership with Ticketmaster.com, and with personal listings via
online dating site Match.com. A new shopping
service
that will help small and medium e-tailing vendors liquidate
excess inventory, much like eBay’s increasingly popular business service, is
expected to go live around the first of the year. Its small business Web
hosting services for broadband providers includes discounts on small
business services from vendor partners such as Office Depot, Monster.com,
Fortune, and Pitney Bowes.

AOL’s expanded
Broadband [email protected]
music service may be free of banner ads but
e-commerce opportunities are hard to miss. In addition to contextual links
to AOL’s music search database, Broadband [email protected] is pitching sales of CDs
or concert tickets right from the R[email protected] player as an artist’s track
plays.

AOL Time Warner’s Chairman Steve Case, during closing remarks, asked the
audience: “Has AOL bottomed out? The answer, we think, is yes.” The company
has faced challenges before, he added, and it will get through the current
rough patch.

“Today marks not just an important new day for AOL, but for AOL Time
Warner,” Case said.

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