Time Warner Confirms AOL Fate

UPDATED: After having aired its strategy debates for weeks in front of anyone
who reads the daily papers, Time Warner today officially announced
“You’ve Got Mail – For Free.”

On a conference call this morning, the company said AOL’s software and e-mail, as well
as various other products, will be free to broadband users.

Among the free AOL offerings include AOL’s integrated software, communications features, e-mail, instant messaging, a local phone
number service and social networking applications.

They’ll also offer safety and security features, such as parental
controls.

The company said it was dropping the broadband ISP business to
enhance the growth of its online advertising business.

This comes
after overall AOL revenues declined 2 percent ($51 million) to $2
billion because of an 11 percent decrease ($188 million) in
subscription revenues, while advertising revenues increased by 40
percent ($129 million).

Internet advertising is a growing industry
overall, increasing 30 percent in 2005.

Time Warner President and COO Jeff Bewkes said on the morning call that making AOL’s software free will keep its members engaged and looking at advertisements.

“This will remove the biggest barrier for members to staying with
AOL,” Bewkes said. “By removing that obstacle, we expect to drive up usage and drive
up engagement.

“Our members don’t want to leave AOL. We’re going to stop sending our
members to our competitors.”

AOL has been emphasizing their ad-supported content of late,
announcing new products, such as AOL Video.

By dropping its ISP business, AOL seems to be cutting its losses on a
losing horse.

As of June 30, AOL counted 17.7 million U.S.
subscribers, a decline of 976,000 from the prior quarter and 3.1
million from the year-ago quarter.

Still, even those declining subscriber numbers bring in a lot of cash
for AOL, totaling $1.5 billion in the first quarter of this year. But
by cutting the ISP revenue, AOL can cut a lot of ISP costs, too.

“This will also take out over a billion dollars of cost by 2007,”
Bewkes said, adding that cut costs will come from marketing expenses.

In the second quarter, AOL parent company Time Warner’s revenues rose
1 percent over the same period in 2005 to $10.7 billion, led by
growth in the Cable and Networks segments, according to a statement.

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