October 28, 2002 5:40 PM PST

MSN, Yahoo pose threat to AOL crown

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America Online will lose a good chunk of its subscribers if it fails to develop a compelling broadband offering, a study released Monday concluded.

AOL, currently the largest Internet service with 35.3 million subscribers, could see its main rivals Microsoft and Yahoo close in on that lead by luring broadband-hungry AOL users to their own high-speed services, according to Forrester Research. While still relatively new, Microsoft's MSN and Yahoo's broadband services are priced low enough to lure on-the-fence AOL users.

"Eighteen percent of dial-up users of AOL are interested in switching to broadband," said Charlene Li, analyst at Forrester Research. AOL "hasn't come out with a coherent strategy" to grow its broadband subscriber base, she said.

Broadband continues to be one of many strategic questions swirling around AOL these days. The online division of media giant AOL Time Warner has seen its online advertising revenue plummet this year, sending the company's stock down more than 60 percent and sparking an investigation by the Securities and Exchange Commission over AOL's accounting practices.

Last week, AOL Time Warner said it plans to restate earnings by $190 million in revenue from improper accounting of deals between 2000 and 2002. The earnings report also revealed that AOL's subscriber base only grew more than 200,000 subscribers from the previous quarter. AOL added 1.3 million over the same period last year.

The broadband issue is a tough one for AOL. The number of broadband households is growing while dial-up growth is slowing. But the dial-up business for AOL has greater profit margins than migrating users over to broadband. Furthermore, any carriage deal that AOL strikes with telephone or cable companies could squeeze margins even lower, since these access providers get most of the broadband subscription revenue.

Both Microsoft and Yahoo currently have deals with broadband service providers. MSN has deals with phone companies Verizon and Qwest Communications International and cable company Charter Communications. Yahoo and SBC Communications are partnering on their own bundled DSL service.

Jonathan Miller, the CEO of the AOL division, is currently conducting a strategic overhaul of the service. Miller said last month that AOL's commitment to broadband is "clear and unwavering." Miller plans to unveil the revamped strategy to AOL Time Warner's board of directors next month and then to Wall Street analysts in December.

One of the biggest factors working against AOL is its price, said Forrester's Li. AOL's broadband subscription costs $54.95 a month, while a competitive offer such as Yahoo's starts at $29.95 a month for six months and then $49.95 thereafter.

Price will also play a significant role in convincing dial-up users' minds about upgrading to broadband, Li said.

"Price is the No. 1 barrier to adopting broadband," Li said.

The study comes after AOL and Microsoft unveiled new versions of their Internet services. AOL 8.0 and MSN 8, as they're called, were both introduced at glitzy events in New York earlier this month, and have been touted by the companies as drastic overhauls of their services. Both companies are backing up their launches with multimillion-dollar marketing campaigns to lure new subscribers or to poach existing ones from their competitors.

 

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