AOL's New Focus

AOL finds itself in an unfamiliar position. It was once regarded as the king of the online world, with a huge base of loyal subscribers. However since the shift to broadband Internet took place several years ago, its dial-up customers have been leaving the service by the millions.

In 2001, America Online (as it was then known) had powerful financial leverage with its soaring stock price, enough that it was able to acquire one of the largest media conglomerates, Time Warner. The combination had been touted as a "dream merger,' set to become the world's first Internet-age media communications company.

Today AOL is struggling. It is now just a unit within a larger conglomerate. While the parent company has been able to turn a profit, the AOL division dropped 5 percent in operating income, according to Time Warner's latest earnings report released last week.

The reality of the situation is not lost on the company's management. AOL expects acceleration in the rate of the decline in its subscribers and related subscription revenues, its second quarter earnings report filed with the SEC stated. "The decline in subscribers has had an adverse impact on AOL's... advertising revenues, in large part, are generated from the traffic to and usage of the AOL service by AOL's subscribers.'

The company announced last week that it would focus on new strategies to give the AOL division a new outlook after several years of lackluster results. AOL would now focus on increasing its share of online advertising, veering away from its traditional aggressive marketing to get new subscribers. In addition, AOL will make freely available to any broadband users some formerly exclusive services including e-mail and parental controls.

Pushing for Ads. AOL was losing its U.S. dial-up subscribers at an accelerated rate. As of June 30 2006, AOL had 17.7 million subscribers, down 3.1 million or 15 percent from a year ago. At its peak in 2002, the company had over 26.7 million people signed up.

The primary factor for the decline in subscribers has been the growth of broadband Internet access. Forty-two percent of Americans had high-speed (Internet access) at home in March of 2006, an increase of 40 percent from the same time the previous year, according to the Pew Internet & American Life Project. AOL has concurred that the shift has contributed to its diminishing customers.

One shining spot in the division was a rise in advertising revenue. The division posted a 40 percent increase in online advertising to $449 million in its second quarter earnings report for 2006. The division hopes to build on this growth in order to boost its overall revenue.

New Vision. The decline in subscription revenue along with a rise in online advertising dollars had a strong influence in the unit's strategy shift. "AOL has adopted a strategy to...navigate a transition from a business that relied heavily on subscription revenue from dial-up customers to one ... tak(ing) advantage of the growth in online advertising,' the company said in SEC fillings this quarter.

The new vision includes a focus on attracting former subscribers. AOL's strategy is to maintain and expand relationships with current and former subscribers.

The transition into implementing the new strategy will not be cheap. It is expected that restructuring charges will range from $250 million to $350 million during the second half of this year and for 2007. The funding for the charges is expected to com from job cuts and divestment efforts such as closing offices, especially in its customer service division.

The company had previously signaled that it was moving away from the subscription-based model to ads. In March, AOL announced an alliance with Internet search engine king Google to use its search technology in return for a license fee. "AOL and Google also agreed to collaborate in the future to expand on the alliance, including the possible sale by AOL of display advertising on the Google network,' according to its earnings report.

The firm's incentives for former subscribers will seek to regain lost customers as well. "Providing them with their familiar AOL software and e-mail for free, over any broadband connection, will be critical to our future success. For members who've left us over the past two years, we've kept your e-mail address,' said AOL Chairman and Chief Executive Officer Jonathan Miller. When this effort is fully operational in early September, you'll be able to come home again - for free.