February 26, 2004 4:37 PM PST

AOL ditches broadband offering

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America Online confirmed on Thursday that it has stopped selling a version of its Internet service that came bundled with high-speed Net access.

At the end of January, AOL stopped accepting new orders for its broadband access service, an AOL representative confirmed, as part of its strategy to sell its service without an access tether. The offering originally cost $54.95 a month for access to AOL bundled with DSL (digital subscriber line) service or with broadband service from AOL corporate cousin Time Warner Cable.

But the recent wave of price promotions from the Baby Bell phone companies, coupled with cable's decision to boost its download speeds, made the AOL offering too expensive for the market.

"I don't think consumers found that sticking to the AOL experience was worth the extra amount they were paying," said Mike Paxton, an analyst at market research firm In-Stat/MDR.

AOL's broadband strategy is critical to the company's future because its core dial-up base is rapidly losing subscribers. In 2003, AOL lost about 2 million dial-up subscribers, many of whom were trying the service via promotional deals and many who left to upgrade to broadband. Other dial-up giants, including Microsoft's MSN and EarthLink, also suffered dial-up losses.

Aside from its dial-up woes, AOL's decision to end its broadband access offering comes as no surprise. For more than a year, AOL has touted its "bring your own access" (BYOA) strategy as a way to sell its service as a standalone to broadband users. The idea is to convince broadband users, whether on DSL or cable, to pay an additional $14.95 a month to access AOL's walled garden of services and content.

"As we've made clear for the past year, we're focused on providing a premium broadband service that works with any high-speed connection," AOL spokesman Jim Whitney said in an e-mail statement.

Indeed, in December 2002, AOL executives said they planned on restructuring their broadband access deals with the Baby Bell phone companies--Verizon Communications, SBC Communications, BellSouth and Qwest Communications--that offer DSL. Executives added that they would try to rework their carriage agreement with Time Warner Cable to get better economics for the service.

Other previous agreements, including a carriage deal with Comcast, have faded as well.

These broadband deals squeezed AOL from many sides. The leasing terms usually meant AOL had to sell its broadband service for prices higher than those of the competition. It also meant thinner profit margins compared with its lucrative dial-up business, which itself was beginning to shed consumers upgrading to other broadband providers.

AOL is not alone in facing this problem. Last year, its archrival, Microsoft, stopped leasing DSL lines from the Baby Bells to focus instead on promoting its own BYOA service called MSN Premium.

Reports of AOL's decision to discontinue its bundled offering first appeared in Broadband Reports' message boards.

 

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