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Wed, Dec 15, 2004 - Page 12 News List

AOL tries dramatic strategy shift to boost ad sales

NEW PLAN Amid declining subscriptions, the firm plans to offer more free programming, moving it into a market that is dominated by Yahoo and Microsoft

AP , DULLES, VIRGINIA

PHOTO: AP

The walls surrounding America Online Inc's well-manicured gardens are crumbling.

In a move both risky and essential, AOL is abandoning its strategy of exclusivity and will free much of its music, sports and other programming to non-subscribers 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 will instead 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 shoulder 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, California. "AOL's dead as it exists. It has to find a way to become relevant again."

Though AOL executives insist the company's short-term prospects are healthy, they agree 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 -- and to do that, it must open its members-only "walled gardens" to the public.

Not that it's 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."

Leonsis insists the change is less fundamental than it seems, given that AOL already has thriving `untethered' properties it acquired, including Moviefone and MapQuest. Leonsis estimates AOL will need to grow 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, launched in 1989, has thrived on selling Internet access plus exclusive programming in one easy-to-use software package that fits on a disc. It's 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 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 overall the number of US. subscribers dropped to 23 million in September, down from a peak of 27 million two years ago.

Nonetheless, AOL remains committed to broadband and says that 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.

True, AOL has 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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