- The Washington Times - Wednesday, November 1, 2006

NEW YORK (AP) — AOL saw its largest quarterly drop in paying subscribers, while traffic to the company’s free, ad-supported Web sites held steady, prompting Time Warner executives to declare yesterday that their online unit’s new strategy is on track.

The accelerated decline had been expected following AOL’s announcement in August that it would give away AOL.com e-mail accounts, software and other services once reserved for those paying as much as $26 a month for Internet access.

In the process, Sterling, Va.-based AOL stopped actively marketing subscriptions and halted the trial discs that often came unsolicited in mailboxes and magazines.

The company lost 2.5 million U.S. subscribers in the July-September period, compared with drops of fewer than 1 million subscribers a quarter since AOL hit its peak of 26.7 million four years ago. That leaves 15.2 million paying subscribers in the United States, nearly two-thirds for dial-up access.

As a result, subscription revenue declined 13 percent, though that was partly offset by a 46 percent boost in advertising over the same period last year, Time Warner Inc. reported yesterday. Online ads now account for 24 percent of AOL’s total revenue, compared with 16 percent a year ago.

AOL’s turnaround and a cable deal with Adelphia helped Time Warner Inc. to report sharply higher earnings yesterday.

The leading media conglomerate, which owns the Time Inc. magazine publisher, Warner Bros., CNN and HBO, earned $2.3 billion (57 cents a share) in the third quarter from $853 million (18 cents) a year ago.

Revenue rose 7 percent to $10.9 billion, shy of the $11.1 billion estimate of analysts polled by Thomson Financial.

Over the past two years, AOL has been increasingly making its features and services available for free in hopes of driving traffic to ad-supported Web sites. In August, it decided to give away most of what’s left to prevent further defections to rivals like Google Inc. and Yahoo Inc.

Data from comScore Media Metrix show that AOL has managed so far to keep people visiting its sites even after they cancel subscriptions.

AOL sites had about 16 billion U.S. page views in September, down only slightly from 16.5 billion in June, before the strategy shift. AOL had 111 million unique visitors in September, a 1 percent drop from a year ago, even as paid subscriptions dropped 24 percent over the past year.

“The early results of the strategy we announced … are encouraging,” Time Warner Chief Executive Officer Dick Parsons said during a conference call. “These members are maintaining their level of usage after they switch. In addition, we are also signing up more new users than we initially expected.”

Jeff Bewkes, Time Warner’s chief operating officer, said only two-thirds of AOL’s 3 million free e-mail users were people who had dropped paid accounts, meaning the company has about 1 million new users who weren’t even subscribers right before the strategy shift.

E-mail is particularly important because people use it frequently and regularly. While checking e-mail on an ad-supported Web page, users may even stumble upon a video clip or other content, boosting AOL’s ad opportunities.

The 46 percent third-quarter boost in advertising is more than Yahoo’s 18 percent though less than Google’s 70 percent.

AOL has been able to grow fast partly because it started with relatively low ad revenue. It had $479 million in the third quarter, compared with $1.37 billion at Yahoo. Yahoo’s growth was about $210 million, greater than the $150 million for AOL.

Time Warner executives acknowledged that AOL might not sustain its recent growth rates, but said the company should be able to keep pace with industry growth trends.

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