Pricing and Profitability
Explain the 20/20 plan.
Today every ISP in the country combined equals about 1.5 million people. Since the middle of July we've had 1 million people sign up for our 20/20 Plan. So what we're trying to be ($19.95 a month for 20 hours) is very expensive when some people think $9.95 for 5 free hours is too high. So what we're trying to do is cut a wide swath through the marketplace for the first-time user, but also for the sophisticated customers.
Will AOL ever follow an unlimited pricing plan?
You probably won't see AOL--as the leader--do anything that's "me too." What we will do is be clever and use our buying power. We have the most members and the most revenues. You can expect us to create new programs and new price points that would be fairly well-serving for members, and also shake up the industry.
I recently spoke with executives that said AOL is currently working on 40 different pricing plans, one of which might mean cheaper fees during off-peak hours or a dollar-an-hour type of program.
We're a consumer marketing company and all we do is test. We test pricing, we test offers, and we test lists. Frankly, the main reason that we haven't gone to a $19.95 pricing point is that consumers have told us that's not what they're looking for. The best example I can tell you is we have 6 million paying customers; all the ISPs combined have 1 million.
What do you mean, "That's not what customers want?"
Twenty bucks is too expensive. See, what you're doing is different. You work at CNET, you live in San Francisco, you're living on the Net, and you use more than 20 hours. Most of our customers use less than seven hours a month. So if you go to $19.95 unlimited and you use only seven hours you're paying a lot of money for your usage.
Most of your customers pay $10 a month?
$9.95 a month, sure.
What's the percentage?
Well, I think less than half the customers go over the $9.95 a month. So people always look at us like we don't know what we're doing, and I kind of say, "Excuse me, we have more people on it." We're the size of the city of Houston right now. That's how you could look at it. So to be specific, we always test price. We launched our 20/20 Plan and you can probably expect more testing, more marketing. We will be very reactive to customers, but we want to lead the industry, not follow it. These kinds of programs that reach out to the other 89 percent that aren't online and don't live in San Francisco or aren't living on the Net, this is all new to them. that's really a sweet spot in the market right now.
If half of your users spend $10 a month, where does your money come from?
Of course we're making money from subscribers, but in any subscription-based business you'll find there's a curve. There's a group that are marginally profitable, there's a group that's marginally unprofitable, and then there's the group that you make the money on. So what we're trying to do is make money obviously on all of the clusters, but open new revenues streams: advertising, transactions, and merchandising. That's where branding comes in like this. We're very fortunate in that we've got a brand that's both needed and loved. Usually brands are needed. TCI is a brand and a cable company; it's needed. Nike or MTV is a brand; they're loved. Coca-Cola is a brand that's loved. We've always looked at ourselves as being a brand that's loved. The people will decide, not the industry pundits. But we went down for 19 hours and the world seemed to stop. But then it dawned on us that we've become a utility. We will do close to a billion hours of usage this year. More people get more interactive services from AOL than all the other services combined. So the brand management is becoming more and more important for us, especially as we move from being an online service, ISP, and of low value to this interactive services media company. But I think where AOL will move to is the lifestyle brand category. That's where we think we can be.
Lifestyle?
Lifestyle brand. The best examples I can give is we will sell about $200 million this year of AOL merchandise and derivative products such as books, hats, T-shirts and the like, and alternative revenues such as advertising and the like. So if you're a brand, people will wear AOL T-shirts and hats. The other day someone was talking to me about brands and I said "Well, look around. Do you see people wearing Microsoft T-shirts? Yes, if you work for Microsoft." But you see people wearing AOL sweatshirts and hats along the lines of an MTV.
