Commentary: New products, renewed AOL?

By Charlene Li, Principal Analyst

Despite declining subscriber numbers and disappearing ad revenue, America Online shows signs of renewed focus. Its new 9.0 software, AOL Latino and kids' services demonstrate that AOL listens to its users--and will compete strongly against MSN and Yahoo.

On paper, AOL seems to be doing badly. Let's take a look:

• U.S. subscribers fell 7.5 percent in the last year. AOL continues to lose dial-up subscribers as many of them adopt broadband--this follows the overall industry trend of dial-up declining from 43.5 million U.S. households last year to 40.5 million in 2003.

• Advertising revenue will drop 35 percent to 45 percent. In its latest financial guidance, AOL said it expects ad revenue to decline from $1.3 billion in 2002 to between $460 million and $600 million this year. Much of that decline comes from the expiration of long-term advertising contracts signed during the dot-com boom.

• Software and service have lagged behind the competition. Last year's AOL 8.0 product scored poorly against comparable offerings from SBC Yahoo and MSN. In particular, AOL was behind in e-mail functionality, parental controls and personalization.

A spirit of revival
But AOL has been busy: This fall saw the release of AOL 9.0 Optimized, the introduction of AOL Latino, the child-focused KOL and the November launch of Red, a service targeting teens. These products reflect a desire on AOL's part to meet and exceed customer expectations in the following ways:

		Related story AOL tries to mend ad ways as market stirs As the online-ad market shows signs of resurgence, embattled America Online is struggling to catch the wave.

• AOL Latino taps into new markets with unique services. AOL Latino serves the U.S. Hispanic market by going beyond simple conversion of the English site with the addition of tailored content like Hispanic music, bilingual Homework Help and revamped sports coverage (soccer instead of American football). Online Hispanics are a quickly growing market--this year, 57 percent of Hispanic households are online compared with 52 percent in 2000.

• KOL and Red target families for broadband retention. AOL 9.0 comes with two new services that target kids: KOL for children 12 and younger, and Red for kids between 12 and 17, each with unique interfaces and original programming. Parents will stick with AOL to get KOL and Red features like parental controls--and also to keep peace with the teenagers who will grow to depend on the content and community.

Raising the bar
While AOL's product introductions are good news for the company, they also herald an AOL that will be a better ad buy, a more valuable partner and a tougher competitor. Specific actions these players should take include:

• Marketers should take advantage of online targeting. Hispanics are much more likely to purchase entertainment and fashion products online than other ethnic groups. Marketers can take advantage of AOL Latino--and Yahoo En Espanol and YupiMSN--to reach Hispanics who otherwise would be difficult to target with traditional media. And by limiting and controlling ad environments on KOL and Red, AOL raises the promotional value to marketers trying to reach kids and teens while giving parents some peace of mind.

• Commerce and media partners should court AOL. As AOL partners, CareerBuilder, Google and iTunes have seen firsthand that AOL doesn't need to own everything that appears within its walled garden. And improved products, robust marketing budgets and a billing relationship with consumers will encourage marketers to strike more distribution deals with AOL. This will be especially important in product and local search, where the company can, one, take advantage of one-click buying with a credit card on file and, two, narrow in on specific geographies for every single user in its system.

• Other portals should market "bring your own access" products based on prior relationships. MSN and Yahoo will find it increasingly difficult to wrest AOL subscribers away with their BYOA services--instead, they should focus on upgrading and retaining their existing free users. Few consumers will conduct side-by-side comparisons of the portal BYOA offerings. Instead, they will base their decisions on pre-existing relationships, such as a personalized page, a Web-based e-mail account or an Internet service provider relationship.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.