Parsons: I Like AOL’s Odds

Richard Parsons, the chief executive of AOL Time Warner, said he “likes the odds” of America Online’s plans to become a broadband player, saying the ISP division has the “best shot” at exploring and developing new services for high-speed Internet subscribers.

Speaking at a Bear Stearns investment conference in Florida, Parsons also said the cable division’s initial public offering could happen perhaps as early as the second quarter, assuming market conditions are agreeable.

If geopolitical events create too much uncertainty in the marketplace, the IPO timetable might be adjusted, “but we’re still on a glide path to the end of the second quarter, and if not, late summer,” he said.

When asked Wednesday evening if he had given up on whether AOL could be a broadband player, Parsons said he had not.

“We have brought in all new management in AOL,” he said, referring to the new CEO of the division, Jon Miller, who replaced ousted CEO Robert Pittman last summer. Miller has since brought in new management teams as part of the company’s plans to build new advertising and commerce revenues after a sharp decline and migrate its mostly dial-up base of 35 million subscribers to high-speed connections.

He said after AOL grabbed the lion’s share of attention after the merger of the ISP and Time Warner in the past two years, the division is now being seen in its proper perspective. “It’s based on a narrowband business that’s going to be around for a while. It generates significant cash,” that the company can use to invest in new services and technology, he said. “I think the balance will come back in, but will be based on expectations we’ve created. We’ve told the marketplace how we’re going with the business and we have to do it.”

The company has said in previous meetings with Wall Street analysts that it expects to strike more carriage deals with cable providers, and that it expects to have just under 10 million broadband subscribers by 2005.

In the meantime, it is offering the AOL service on top of broadband services, known as “bring your own access” for $14.95 a month. The AOL service on top of a basic monthly broadband bill pushes AOL broadband’s monthly cost into the high $40s and low $50s, within the highest tiers of pricing in the industry so far.

AOL is also trying to strike broadband access arrangements with cable and telecommunications 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).

The division’s approach to building broadband has concerned analysts and investors who note the pace of broadband’s growth, and question how AOL can bridge its own base to broadband. In its fourth quarter and year-end earnings results, AOL said it added 1.2 million U.S. users during 2002. But it also lost about 176,000 subscribers during the fourth quarter, normally a period of robust growth with the holiday season.

Although he did not address specifics of the company’s broadband plans, Parsons told the conference that the online medium in general is still in the “nascent stages, and that no one is certain of how broadband is going to roll out. But it more than stands to reason that it will develop and there will be services needed with those connections, he said.

“I think we’ve got the best shot in exploring what that is. I just can’t give you the dimensions of what people will pay,” but the AOL division has the platform to create community and content for those broadband services, he said. “I like our odds. But if some were to say to me there’s risk there, and we don’t know how to value that right now, that I understand,” he told the analysts.

Parsons said Time Warner Cable subscribers’ response to new digital services such as video on demand (VOD) and subscription video on demand (SVOD) have been encouraging. He cited new on-demand digital services for TWC customers in Columbia, S.C., which have been available for six months so far. Fifty percent of the subscribers to the HBO channel have taken on the $7 monthly VOD product that lets digital subscribers order certain programs such as The Sopranos on demand, he said.

In a new research report on digital cable services, Jupiter Research, whose parent company also owns this publication, said subscription video on demand (SVOD) would drive cable profits and attract customers to new digital premium services.

The report, which studied the impact of on-demand content on cable revenues in the U.S., said the VOD market will grow from $293 million in 2003 to $1.4 billion in 2007. SVOD is expected to top $800 million, up from $56 million in 2003. Overall, the report said it expects the market to grow by 58 percent annually, from $349 million in 2003 to $2.2 billion in 2007.

“We’re seeing double digit growth in the digital tier,” Parsons added, and “good take-up on high speed cable modems,” which he said is helping the cable division win subscriptions back from competing satellite cable television providers.

“We’re very bullish on the business.”

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