Time Warner outlined on Wednesday a radical plan to revive AOL by making more money with far fewer subscribers.
AOL will stop marketing its highly profitable Internet access service and offer most of its main features for free. As a result, it expects to lose more than half of its 17.7 million subscribers over the next three years.
Still, Time Warner promised investors that AOL's operating profit would actually increase every year. It said it would be able to cut US$1 billion a year from AOL's expenses -- largely by cutting thousands of marketing and customer-service jobs -- and increase its advertising sales on an expanded line of free Web-based services.
Indeed, the company said on Wednesday that AOL's ad sales increased faster than expected in the second quarter, one of several factors that helped Time Warner earn US$1 billion in the period, ahead of expectations. It was also helped by strong results in its cable and movie divisions and by a price increase for some AOL customers, though magazine operations faltered.
While initial reaction to Time Warner's announcement was favorable -- its shares rose US$0.42, or 2.58 percent, to US$16.67 -- some analysts said they were skeptical of the financial projections for AOL.
"I think it would be an amazing achievement to cut US$1 billion in costs" and still increase profitability, said Gordon Hodge, an analyst with Thomas Weisel Partners.
Hodge said AOL's operating income would probably decline this year and next year because the company would not be able to cut costs as much as it says.
In an interview, Richard Parsons, Time Warner's chief executive, said the company's forecast was based on careful analysis of data.
"People have wanted to bury AOL almost from the day after the merger," Parsons said, expressing frustration with Wall Street analysts. "Give us some credit for having some knowledge, probably greater than your own, of who our customer base is."
He pointed out that AOL had increased its operating profit over the last few years even as its revenue had fallen.
"We don't see any material step down in AOL's earnings for the year as a result of this change," Parsons said. "If anything, there is a slight bias to the upside."
Some investors took the opposite view -- that AOL in fact is late to embrace free advertising-supported Web sites.
"It's something they should have done two or three years ago," said Morris Mark of Mark Asset Management, which owned nearly 612,000 Time Warner shares at the end of March. "They're going to lose these people anyway."
Jonathan Miller, chief executive of AOL, told investors in a conference call that AOL had needed to wait until now because it had to rebuild its advertising systems and sales force.
Ad revenue up
In the second quarter, AOL's advertising revenue grew by 40 percent from a year ago, to US$449 million. That is faster than the 27 percent growth in advertising revenue at Yahoo, the second-largest seller of Internet ads, but slower than the leader, Google, which increased its revenue at 77 percent in the quarter.
In the meantime, AOL has been fighting a losing battle to hold onto its subscribers. In the second quarter it lost nearly 1 million subscribers, and it has lost 3 million over the last year. The company estimates that it will lose more than 6 million paying subscribers over the next year. The average subscriber now pays US$19.42 a month, meaning that the company will forgo at least US$1.4 billion a year in annual revenue.