April 22, 2004 4:00 AM PDT

Portal envy strikes AOL

After fighting a rearguard battle for much of the past two years, America Online is going on the offensive with a new plan to retain customers and expand its business on the Web--a strategy it has tried before with little success.

On Thursday, AOL's CEO Jonathan Miller will present a turnaround plan for the online giant to the Time Warner board of directors. AOL declined to make Miller available for an interview for this article, but a source familiar with AOL's plans said Miller will offer new cost-cutting measures and sketch out a blueprint aimed at tapping the resurgent online advertising market.

Central to this strategy is transforming the company's AOL.com Web site to attract more visitors and sell more ads on the open Internet--a sharp break from its past focus on beefing up its own proprietary service.

"It shows the fickleness of the Internet market where AOL, which was so dominant three or four years ago, may have to reinvent its business," said Mark May, an analyst at Kaufman Bros.

News.context

What's new:
AOL's CEO Jonathan Miller on Thursday will present a turnaround plan for the online giant to the Time Warner board of directors.

Bottom line:
Central to the strategy may be transforming the company's AOL.com Web site to attract more visitors and sell more ads on the open Internet.

More stories on this topic

The idea of turning AOL.com into a Web portal along the lines of Yahoo or Microsoft's MSN is not new, but it comes at a critical time for the Time Warner division. Among other things, AOL faces slipping subscriber numbers and two federal probes into its business practices. Time Warner executives are also rumored to be looking more carefully at options to sell AOL, although they appear to be willing for now to give the division a chance to redeem itself.

The first step in Miller's plan comes this summer when the company relaunches AOL.com to include similar content and features found on its proprietary service. While the relaunch will be only for members to access, AOL.com could eventually offer more of its content and services to the general public, sources said.

AOL has taken a handful of other steps aimed at opening up its closed network. This includes releasing a new version of its e-mail client that will let customers access messages without firing up the AOL client. AOL has also begun hiring software developers for its Netscape subsidiary, although the company has kept under wraps its plans for the one-time browser king, purchased for more than $4 billion in 1998.

But Miller will have to overcome significant skepticism over AOL's prospects, including criticism that the new plan echoes similar efforts in the past that made little headway.

Google: The silent savior?
If AOL is successful this time, it would mark a major new direction for a company that has long boasted the advantages of a closed network melding access charges with proprietary content. Now with dial-up subscribers unplugging for faster broadband access or cheaper narrowband options, it appears that the way to survive means a more balanced mix of revenue.

AOL has proven naysayers wrong in the past, building the world's largest Internet service provider (ISP) with more than 35 million subscribers worldwide at its peak. The company's reach gave it enormous leverage over advertisers, commanding long-term contracts worth hundreds of millions of dollars from single customers in some cases.

Now AOL's large base of dial-up ISP subscribers has become its Achilles' heel, as broadband services from cable and phone companies grow in popularity. Last year, it lost more than 2 million members, although the company says many of those people were not paying anything for the service.

Much of AOL's turnaround plan to date has centered on selling a version of the service for broadband users. Dubbed the "bring your own access" strategy, the idea is to sell AOL to people who already have broadband access via their phone or cable company. As of last quarter, AOL had 3 million subscribers with broadband access, which includes "bring your own access" members.

With Internet advertising now on the rebound, AOL is reopening a front to tap more revenue.

Online ad sales have surged during the past two years, thanks to the rise in paid search from giants such as Google and Yahoo's Overture Services. Paid search now accounts for 35 percent of the $7.27 billion in online advertising revenue in 2003, up from 15 percent in 2002, according to the Internet Advertising Bureau.

Meanwhile, display ads in the form of banners and graphic-intensive brand promotions have also seen a rebound, with Yahoo being the main beneficiary during the past few quarters.

The growth of paid search in particular has contributed to AOL's coffers. Its deal to host Google's AdWords links added $200 million of cash into its bank account last year, and Google alone will help AOL report a gain in advertising revenue in 2004, despite reporting a 40 percent loss in the business last year.

People close to AOL say its portal moves are more intent on creating a media business based on drumming up audience figures and selling more advertisements in front of them. But the financial gains from Google AdWords cannot be ignored, and AOL will likely try to tap such revenue by driving more searches and serving up more sponsored links.

"Google has been very profitable for them, so they will try to plug in Google with as many properties as they can," said Safa Rashtchy, an analyst at Piper Jaffray.

Portals in its history
AOL's attempt at becoming a portal is familiar territory. The company has toyed with the idea of launching an all-inclusive Web portal since the late 1990s in many different shapes and forms, with most of these efforts going nowhere. AOL has long struggled with pursuing an aggressive portal strategy while preserving content on an exclusive basis for its members.

AOL's current "bring your own access" product has offered customers exclusive access to magazine content from its corporate cousin Time Inc. Articles and features from People and Entertainment Weekly can now be accessed online only by AOL members and magazine subscribers; the same will apply if content is pushed onto the Web through AOL.com.

In the past, however, executives tried to use Netscape as a way to offer free Time Warner content in hopes of driving larger audiences and tap advertising revenue. But the online ad decline of the early 2000s put an end to that ambition and left Netscape.com largely in the dark.

It's not the first time that AOL has used Netscape as a test dummy for its portal ambitions. In 1999 and 2000, AOL redesigned Netscape.com first as a "daytime" portal where people could get information during work. Less than a year later, AOL relaunched Netscape.com again, this time as a "small business" portal for what the company considered a growing audience online.

Netscape wasn't the only site revamped for the purposes of luring eyeballs. Soon after AOL bought instant messenger ICQ in 1998, it tried to turn the software into a "desktop portal" where people could launch a separate browser, search for Web content and chat with others. Longtime ICQ users criticized the software as being too bloated, and AOL eventually launched a "lite" version without all the bells and whistles.

AOL.com has had its fair share of facelifts, but its identity has remained a marketing vehicle to attract nonmembers to become subscribers. AOL members can use the site to check their e-mail and other personalized areas such as calendar and photos. But AOL's long-awaited move to challenge Yahoo continues to be an untapped trove.

"It's the single most underused URL in the world," said one AOL insider who spoke under the condition of anonymity. "What makes this (new plan) different from other portal strategies?"

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The Playing Field Has Changed
AOL seem unable to fully recognose that the ISP market has changed in so many ways. They may have a wonderful portal but there are other wonderful portals that are "free to air", e.g. the BBC. There are ISPs that provide an excellent broadband service at a far cheaper price than AOL and do not require the customer to mess with his registry.
AOL - get the common touch.
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