Did AOL Shoot Itself in the Foot?

America Online was the biggest success story of 2001 with its purchase
of Time Warner, Inc., becoming an Internet service provider (ISP) with Wall
Street clout. But did the move stifle its own broadband migration?

That AOL Time Warner is the largest ISP in the world isn’t
in doubt, with more than 35 million Internet subscribers on six continents
— 28 million of which are U.S. customers. It’s
was supposed to signal the logical migration of many U.S. customers from
dial-up into high-speed Internet access.

And, in many regards, they’ve been successful. Road Runner, which AOL Time
Warner owns, is one of the largest broadband providers in the nation, with
approximately two million subscribers.

AOL’s broadband presence effectively ends outside the borders of its Time
Warner Cable network, however, shutting the giant out of many markets
throughout the U.S.

When AOL bought up the Time Warner cable network giant (the second-largest
in the land), it immediately became a rival of Comcast , Cox
, Charter and a host
of other cable companies. Because federal requirements for open access on
these networks were never realized, AOL has to strike a deal with those
networks for inclusion to provide third-party services.

According to many reports, those cable companies are seeking advantageous
advertising revenue agreements, which AOL so far hasn’t agreed to sign.
Because nothing forces the other cable companies to deal with competitors,
AOL is left out of a major portion of the broadband loop.

So far, AOL’s cable rivals have penned deals with major national dial-up
ISPs like EarthLink and United Online (formerly Juno
and NetZero) .

Mark Kersey, a broadband industry analyst with ARS, Inc., said there’s no
real reason why other cable carriers would want to open up their networks
to one of their biggest rivals, even though most cable networks don’t
physically share the same space or compete head-to-head.

“(AOL) is trying to sign open access agreements with Comcast and other
cable companies knowing they are the sister company of AOL Time Warner, so
someone like Comcast certainly has no incentive to open up its network to
one of its rivals,” he said. “It’s definitely a problem for them, and the
merger set AOL back in that regard.”

The luxury of picking and choosing third-party access isn’t one AOL
Time Warner has at its disposal. The company had to open up the Time
Warner Cable network to the competition involuntarily, one of several
placed by the Federal Communications Commission and the
Federal Trade Commission.

The situation has put AOL Time Warner’s business operations in a quandary.
As more and more AOL customers switch to broadband, they are going to
someone else for that high-speed connection. The Wall Street Journal
predicts as many as one in four new cable customers are former AOL

The WSJ reports AOL Time Warner Co-Chief Operating Officer Robert Pittman
has asked his employees to focus on keeping fleeing subscribers as AOL
account members. According to Pittman, AOL’s broadband strategy is to go slow.

“A lot of companies go broke trying to speed up the consumer adoption curve
(for broadband service),” he told the WSJ.

In essence, AOL wants its customers to keep a $23.90-a-month account open
for basically the chat rooms and an email address in addition to a $50
monthly broadband bill. In any environment, that’s a tough sell.

At issue is the company’s reluctance to give up any customers to broadband,
be it to one of its own broadband services cable or digital subscriber line
(DSL) or another company’s. According to Kersey, dial-up has been AOL’s
cash cow, and nobody at the corporation wants to cut into that profit margin.

“The core problem with AOL is that their traditional narrowband service is
so profitable in terms of the margins they get on it, and when they resell
DSL it’s really not profitable for them,” Kersey said. “In fact, they probably
take a loss on it. So for them, there’s a financial disincentive to convert
people to broadband.”

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