August 2, 2005 4:00 AM PDT
AOL ready to reinvent itself
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The country's largest Internet service provider lured millions of tech newbies online with its omnipresent dial-up discs and members-only content, offered an e-mail service that starred in a Hollywood movie, and merged with media giant Time Warner in a staggering stock transaction worth about $160 billion.
Needless to say, the merger fell short of expectations. Five years after the tech bust, AOL's bread-and-butter dial-up subscription business is declining because of cheap broadband Internet access. And Net stalwarts like Yahoo and Google, which AOL once dwarfed, are running away with the online advertising market.
America Online is spending $50 million to promote the launch of a new portal that will make the services and content previously available only to AOL subscribers free to everyone.
ISP hopes to build portal traffic fast enough to make up the difference for its declining subscriptions.
To back up the plan, AOL is reportedly spending more than $50 million on a marketing campaign that's scheduled to begin this week. Though ads will appear in magazines and newspapers, on billboards, and during some radio and television broadcasts, the heart of the campaign will be online, said Kevin Conroy, chief operating officer of AOL's media networks.
To many analysts, the move is a no-brainer. AOL's subscriber list has dropped from more than 26 million in March 2002 to 21.7 million this year, largely because AOL's dial-up customers are defecting to broadband. Subscription revenue declined by $116 million between 2003 and 2004, but ad sales increased $220 million, helping total revenue increase $100 million to $8.7 billion. AOL is scheduled to report its second-quarter results on Wednesday.
With numbers like that, it doesn't take a genius to figure out that advertising is where AOL should be moving its chips. The company's goal with the portal makeover is "to leverage the traffic we already have and recirculate it from one site to the next, and attract new users by opening up content to the Web, and monetize that more effectively by having a wider audience," said Jim Bankoff, executive vice president of programming and products at AOL.
A tricky balancing act
In other words: Build portal traffic fast enough to make up the difference for all those lost subscribers. And more traffic equals more ad dollars. "I believe in their strategy," said David Card, an analyst at Jupiter Research. "They're doing the right things, but they have to execute against that strategy."
It will be a tricky balancing act. "I would have told you by now they'd be looking for suitors for the dial-up business, but they've said it has high margins for them because they worked over the years to make it an efficient infrastructure," said Gartner analyst Allen Weiner. "That leaves you with the conundrum of can they do both? I don't believe they can."
Still, don't feel too bad for AOL, because the company is certainly not starting the free portal business flat-footed. In June, AOL was the fifth most popular Web site in the United States, with about 74.4 million unique users, trailing Yahoo, Microsoft, MSN and Google, according to Nielsen/NetRatings.
"Yahoo definitely has a head start on them," said Jeff Marshall, managing director of the digital marketing arm of advertising and branding company Starcom MediaVest Group. "But AOL has a library of content, essentially troops in the wings waiting to create original programming for the Web...It's going to be a great revenue stream for them to be able to put ads in front of assets they already have
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