- The Washington Times - Sunday, December 12, 2004

STERLING, Va. — The walls surrounding America Online Inc.’s well-manicured gardens are crumbling.

In a move that is both risky and essential, AOL is abandoning its strategy of exclusivity and will free much of its music, sports and other programming to nonsubscribers in hopes of boosting ad sales.

The decision could help the company counter declining subscriptions as Internet users move to high-speed connections. At least, that’s the plan.

The danger is that the bold new strategy instead will accelerate the erosion of AOL’s core revenue source.

To begin with, the change pits AOL against big guns Yahoo Inc. and Microsoft Corp., which in turn are looking over their shoulders and wondering what search leader Google Inc. will do next.

“AOL is left looking like the race car in a race that nobody wants to run in anymore,” said Rob Enderle, an industry analyst in San Jose, Calif. “AOL’s dead as it exists. It has to find a way to become relevant again.”

Although AOL executives insist the company’s short-term prospects are healthy, they agree that they ultimately must rely less on their legacy subscription business. With the recent renaissance in online advertising, AOL wants a bigger share of those dollars. To do that, it must open its members-only “walled gardens” to the public.

Not that it is abandoning the subscriptions: It’s all about a better balance.

“Having two revenue streams inoculates you from the vagaries of the industry,” said Ted Leonsis, vice chairman in charge of AOL’s new ad-driven audiences division. “We could have an advertising recession, and that would be really bad if you were just an advertising-driven company.”

Mr. Leonsis insists that the change is less fundamental than it seems, given that AOL already has thriving “untethered” properties such as Moviefone and MapQuest. Mr. Leonsis estimates that AOL will need to increase its monthly audience of unique visitors, to all the sites it owns, by only 25 percent within five years.

In fact, AOL’s sprawling headquarters outside Washington shows little sign of change save for a new triangular logo that now points to the right, or forward, rather than up. Employees change supervisors, not offices. The mission statement in the lobby remains a legacy of ousted chief executive Steve Case.

AOL, which was started in 1989, has thrived on selling Internet access plus exclusive programming in one easy-to-use software package that fits on a disc. It is how millions first got onto the Internet.

But as Internet users matured, they often dumped AOL along with their dial-up connections.

AOL responded by setting up a broadband division, first focusing on a packaged offering similar to its dial-up and later concentrating on a programming-only plan called “bring your own access.”

The company now has nearly 5 million broadband subscribers, up from about 3 million a year ago.

But the overall number of U.S. subscribers dropped to 23 million in September, down from a peak of 27 million two years earlier.

For many, exclusive programming alone wasn’t worth the $14.95 monthly fee on top of DSL or cable service.

Nonetheless, AOL remains committed to broadband and says it considers the free access to programming a natural outgrowth.

“We’ve built that new business, and now we have an opportunity to focus on creating a different, a new balance, a better balance” between subscription and advertising, said Kevin Conroy, AOL’s executive vice president for Web brands.

AOL has taken a late start compared with Yahoo and Microsoft’s MSN, but executives say the shift couldn’t have occurred any sooner.

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