AOL announces a new strategy, again
THIS summer, AOL, the internet division of Time Warner, a big American media company, learned what the web can achieve. A customer named Vincent Ferrari called AOL to cancel his subscription to its internet-access service. In the face of extraordinary resistance from the firm's customer representative, he had to repeat his request 21 times. Mr Ferrari posted an audio clip of his struggle on the internet and it became a huge hit.
The episode may prove to have been the firm's nadir. This week Time Warner announced a daring new strategy for AOL, which if successful could mark a clear break with its difficult past. AOL will start giving away its software, e-mail and security products free to all broadband internet users. By doing this, AOL is giving up many hundreds of millions of dollars (which will be offset by lower marketing and other expenses). But subscribers are defecting from the firm in droves in any case. In the first half of 2006 it lost 1.8m of them, and it now has 17.7m subscribers in America, down from 28.6m at the end of 2002.
This way, Time Warner hopes that AOL can maintain a relationship with people who leave. Its broader plan is to build a new internet-advertising business to replace the revenues from its declining internet-access side. That was already its strategy before this week's news. The problem was that most of AOL's page views were being generated by the firm's subscribers rather than by random internet surfers. In the second quarter, AOL said, its own members made up 36% of unique visitors to its network of websites, but generated 80% of page views. As subscribers left, therefore, AOL was losing page views too. Its new strategy will hasten the death of its access business, but should give its advertising side a better chance to grow.
Will it work? There is a risk that AOL will lose revenue from subscribers even more quickly than it expects, which would damage its parent's earnings and upset Wall Street. At the moment, AOL assumes that many of its dial-up subscribers will stick with their slow internet access and continue to pay for its services. But these people may make more effort to switch to broadband once they see other people paying nothing for AOL's services. And AOL needs to improve its products and its portal in order to compete for internet advertising with companies such as Yahoo!. Since last year's Live8 concert, which millions of people watched on AOL.com, the site has had no big hits. Henry Blodget of Cherry Hill Research, a research firm, says that Time Warner's move is smart in the sense that it doesn't have much of a choice, but that the chances of success are still quite low.
That said, shareholders in Time Warner, such as Lawrence Haverty, of the Gabelli Global Multimedia Trust, an investment company, were impressed by the growth in internet advertising at AOL in the second quarter. Ad revenue leapt 40%, an acceleration from the first quarter's increase of 26%, and faster than the overall market for internet advertising, which grew by about 30%. The strong growth suggests that giving up revenue from subscribers in the hope of getting more from ads could indeed reinvigorate AOL over time.
The stakes are particularly high for the main architect of the new strategy, Jeff Bewkes, president and chief operating officer of Time Warner, and the heir-apparent to the firm's chief executive, Richard Parsons. Time Warner's share price has been falling for a while, and has declined by 9% since the firm saw off Carl Icahn, a corporate raider, in February. Fixing AOL, both agree, is the surest way to get the share price to head upwards once more.