December 3, 2002 9:39 AM PST

AOL to undergo revamping

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NEW YORK--AOL Time Warner unveiled plans Tuesday to revamp its struggling America Online unit, which expects advertising and commerce revenue to fall 40 percent to 50 percent in 2003.

In a highly anticipated meeting with analysts Tuesday, AOL Time Warner cut the advertising and commerce outlook for its AOL division. The company maintained, however, that the decline will be offset by growth in subscriptions and that overall revenue will be flat.

According to analysts, AOL's financial housecleaning wasn't totally unexpected. AOL's earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to fall 15 percent to 25 percent year over year, due largely to the drop in high-margin advertising and commerce revenue.

"I'm now fully confident we will stabilize this year and, going forward, reach double-digit growth," said Don Logan, chairman of AOL Time Warner's Media and Communications division.

Companywide, AOL Time Warner expects to hit the low end of earlier predictions of 5 percent to 9 percent EBITDA growth. Revenue for the company as a whole should grow 5 percent to 8 percent.

To cushion the worries about growth, AOL offered a sneak peek at AOL 9.0, which looks dramatically different from the latest version of its flagship Internet service. AOL also announced a bevy of alliances with its corporate cousins to bolster its content lineup. The online unit plans to feature content from AOL Time Warner properties such as CNN, Time Inc., Warner Music Group, Warner Brothers, New Line and HBO.

Another primary focus of the meeting was broadband. Notably, AOL wants to partner with cable and DSL (digital subscriber line) providers and promote its bring-your-own-Internet-access plan, which charges $14.95 per month. These ideas have been floated before, but haven't panned out.

AOL Time Warner's top brass, including Chairman Steve Case, CEO Richard Parsons and Logan, along with America Online CEO Jonathan Miller, were on hand to emphasize that this time would be different. "Starting tomorrow, it's all about execution," said Case.

Miller offered hints that the company may unveil new pricing plans in the coming months to appeal to a broader range of customers. On the table, he said, could be low-cost plans and a deal that might allow several family members to access the service at the same time.

Although AOL's standard dial-up and broadband plans are currently among the most costly in the industry, Miller said the company would not rule out the possibility of a rate increase in the future.

"If we build value into the product, we can do that going forward," Miller said, although he added the company has no immediate plans to do so.

Analysts at the meeting reflected a wait-and-see attitude. "What they said today is not too different from what they've alluded to before," said Paul Kim, an analyst with Kaufman Brothers. At the same time, he said, "they definitely put more meat on the bones."

On the commerce side, AOL is planning to build more shopping destinations that highlight liquidation commerce. It will also focus on classified advertising and lead generation for marketers.

AOL's biggest problem right now is lower revenue from its previous big-ticket ad deals. For 2002, AOL is expected to bring in revenue of $8.8 billion to $9 billion, with advertising and commerce revenue of $1.5 billion to $1.6 billion.

AOL's ad division has been a particular source of concern. In the third quarter, advertising and commerce revenue dropped 48 percent from the same period last year. The company recently let go of about 90 people in its ad sales division.

 

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