- The Washington Times - Thursday, July 6, 2006

AOL’s transition away from subscriptions toward an advertising-based business model may include providing e-mail and other services free to consumers who have high-speed Internet connections from rival providers.

The Sterling, Va., company last year introduced its AOL.com portal that made previously premium content free to all users, and has seen its Web audience numbers grow while U.S. subscribers fell to 18.6 million in the first quarter of this year, a drop of 835,000 from the previous three-month period.

One proposal being considered to further erode AOL’s reliance on a subscription-based model would make AOL services, including e-mail with an AOL.com address, free to users with high-speed access or dial-up service from another Internet service provider. AOL’s dial-up customers still would have to pay.

The proposal was first reported yesterday by the Wall Street Journal. An AOL spokeswoman declined to comment on it.

Fifty-four percent of online households had broadband connections last year, outnumbering dial-up for the first time. Broadband is expected to reach more than 62 percent of households this year and nearly 72 percent by 2010, according to research firm IDC.

Industry analysts were not surprised by AOL’s potential shift to the ad-supported plan, but said the company must continue to offer compelling content and avoid alienating existing customers to be successful.

“It’s definitely a big shift in [broadband] strategy, but AOL has had a number of big shifts in the last several years,” said Joe Laszlo, senior analyst with Jupiter Research in New York.

AOL has been partnering with phone and cable broadband providers in the past six months, he noted.

“The biggest challenge to AOL is coming up with a solid business strategy and explaining that to its customers and sticking with it,” Mr. Laszlo said.

The payoff could be huge. Internet advertising revenue reached a record $3.9 billion for the first quarter of the year, the Interactive Advertising Bureau and PricewaterhouseCoopers announced in May. Total Internet ad revenue reached $12.5 billion last year, up from $9.6 billion in 2004.

The market should reach at least $15 billion this year with the four largest portals — Google, Yahoo, MSN and AOL — controlling half of those dollars, Michael Kelly, president of AOL Media Networks, said last month at a digital media conference in McLean.

AOL parent Time Warner Inc. offers its own broadband service, and its holdings include Home Box Office, New Line Cinema and Warner Bros. That portfolio puts the New York company in the best position of the big four not only to offer access to information and to provide content, but to profit from it online, said Melissa Webster, program director for content technologies and digital media at IDC in Framingham, Mass.

It is expensive to run a dial-up Internet service, so even losing a reported $2 billion in subscriptions would be more than offset by increased revenue from advertising and payments for premium content, Ms. Webster said.

Amy Lind, a consumer broadband analyst at IDC, said AOL’s proposed transition could result in lower prices and better content from AT&T;, BellSouth and Verizon, all of which have partnered with Yahoo on high-speed Internet services. An even bigger shake-up could be in the cards for cable providers such as Comcast Corp. that so far have resisted content partnerships.

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