Digital Media

Some broadband users are considering going back to dial-up as the tough economic climate forces them to cut their household budgets, according to a story published Friday in the Chicago Tribune.

While it's unlikely Americans will ditch broadband for dial-up en masse, there are likely to be some people who find the $20 to $50 monthly fees for DSL or cable modem broadband service to be too high, when dial-up providers such as NetZero are offering new $9.95 service plans.

One Florida man, Arnold Zimmerman, 66, said that after his work hours got reduced and his stock portfolio tanked he was looking to make cuts.

"I didn't think I would ever go back," the Tribune article quoted Zimmerman as saying. "It was terrible. But with this economy, you got to look to cut wherever you can."

For several years, Internet users have been ditching dial-up Internet service for broadband service. But executives from United Online, which owns dial-up providers NetZero and Juno, said they saw the percentage of people dropping the company's Internet service hit a new low of 4.3 percent during the fourth quarter of 2008.

Still, broadband services have been growing strong for cable and phone companies. And even though some higher-speed services are pricey, consumers can still find cheaper alternatives, especially if they are able to get DSL service.

For example, Verizon Communications offers a 1 megabit per second service for $17.99 with a one-year contract. Subscribers must also have a Verizon phone line. But if they don't they can get the service for $19.99.

AT&T is offering a special promotion for its 768 kilobits per second service for $9.99 a month. The special offer applies only to new AT&T DSL customers. And subscribers must also have an AT&T phone line, sign up for the service online, and agree to a one- year contract. Current AT&T customers can get the service with the same restrictions for $19.95 per month.

But I'm not entirely convinced people will cut back at all on their broadband even as the recession worsens. As CNET News has reported previously, some consumers are actually increasing the speed of their broadband connections to access more entertainment at home. Instead of cutting broadband services, these consumers are cutting their cable or satellite services and are using their fast broadband connections to watch free TV from the Net. They're also watching some TV for free from over-the-air broadcast stations.

If you've got tips for saving costs by cutting back on technology, I'd love to hear from you. Please send me an e-mail at maggie.reardon@cbs.com.

CNET News senior writer Dawn Kawamoto contributed to this report.

Time Warner has taken a step closer to splitting up AOL's business, The Wall Street Journal reported Monday.

Time Warner is expected to announce Wednesday that it has completed the internal process of separating AOL's dial-up Internet access business from its advertising business, the newspaper said.

Time Warner has been talking about splitting the company into two different entities for a while now. And it's been a main focus of Time Warner Chief Executive Jeff Bewkes, who took over as CEO seven months ago. AOL has long been viewed as a problem for Time Warner, as its dial-up business declines and its advertising business struggles to compete.

Time Warner has been examining several options with respect to splitting up the company, including selling off both pieces of the business or partnering with other companies.

But separating the business hasn't been as easy as it sounds as the company tries to figure out how to divide revenue, staff, and liabilities. Earlier, Bewkes had said he expected to have the process completed by the end of the second quarter. Time Warner will announce second-quarter results on Wednesday.

Once the separation of AOL's advertising-content and dial-up businesses is concluded, it may aid potential suitors like Yahoo and Microsoft in sizing up an offer price.

Yahoo reportedly turned to Time Warner and its AOL division as a potential white knight, after Microsoft .

AOL has continued to talk with Yahoo as the on-again-off-again Yahoo-Microsoft buyout talks plodded along, and later expanded to involve a potential AOL-Microsoft deal.

In the past few weeks, the hubbub of an AOL-Yahoo, or AOL-Microsoft deal has quieted down, following a truce between Yahoo and its investor activist Carl Icahn, who was waging a proxy battle with the hope of pushing Yahoo and Microsoft to do a deal.

And in the latest AOL-Yahoo turn of events, Time Warner nixed any plans for former executive Jonathan Miller to serve on Yahoo's board, citing his no-compete clause.

EarthLink CEO Rolla Huff said last week when the company announced its second-quarter earnings that it is interested in buying AOL's dial-up business. He didn't give specifics, but he said that AOL's 8.7 million subscribers would provide a big revenue boost to the company. EarthLink currently has only 2.2 million dial-up subscribers.

Even though dial-up is a dying business, it still generates cash and a predictable revenue stream, which makes AOL's dial-up business particularly attractive to EarthLink and potentially other dial-up providers.

Internet service provider EarthLink could be interested in buying AOL's dial-up business, its CEO told The Wall Street Journal in a story published Wednesday.

EarthLink CEO Rolla Huff first brought up the idea of EarthLink buying AOL and other dial-up providers during the company's quarterly conference call Tuesday.

"We believe we're best-positioned to be the consolidator in this industry," Huff said during a conference call with analysts.

The news has spurred a flurry of speculation that EarthLink is looking to buy Time Warner's AOL. Huff wouldn't comment specifically on whether his company has had talks with Time Warner. But in an interview he told The Wall Street Journal that merging AOL's dial-up business with EarthLink's would create cost savings for the company and better service for customers.

"We think it's worth aggressively pursuing," he told the newspaper.

Huff also told the Journal that any discussion with Time Warner over the fate of AOL would be affected by talks between Microsoft and Yahoo.

It's no secret that Time Warner wants to get out of the AOL dial-up business. The company was previously in discussions with Yahoo to sell AOL and take a stake in the company to help thwart Microsoft's takeover bid.

But ditching AOL's dial-up business hasn't been easy. AOL and EarthLink, which each are considered pioneers in the Internet access business, have suffered sharp subscriber declines over the past few years as more Internet users migrate to faster-speed broadband networks. With more than 90 percent of active Internet users today connecting to the Net via broadband, it's safe to say that dial-up is dying.

That said, it's been a slow death. And EarthLink executives have been quick to point out that despite being yesterday's technology, dial-up still generates a lot of cash. And even though there isn't much of a future left in dial-up, EarthLink has decided to ride it to the end.

As a result, the company has spent the past year dumping other, riskier businesses such as its citywide Wi-Fi business and its stake in the wireless mobile virtual network operator Helio. It has also shed about half its staff.

The reorganization of the company has propped its stock up about 30 percent over the past year. And EarthLink's aggressive cost-cutting has had a positive effect on earnings. For the second quarter of 2008, the company reported a profit of $52.2 million. This is compared to a loss of $16.3 million a year ago.

But these profits come as revenues fall due to subscriber losses. For the second quarter, EarthLink reported revenue dropped 21 percent to $245.6 million. The company also reported a 30 percent drop in dial-up subscribers, bringing the total to 2.2 million. And it said that it ended the quarter with 1.1 million broadband subscribers, a 9 percent decline from the previous year.

Huff is interested in acquiring dial-up customers as a way to boost revenue, he told the Journal. But even if EarthLink buys AOL's dial-up business or the dial-up business of other providers, such as United Online or MSN, the company will eventually have to face the reality that dial-up is going away. It might not happen this year or next year, but it will happen eventually. Think of cassette tapes and VHS video tapes. You might be able to find some stores that still carry them, but for the most part, the industry has moved beyond these technologies and it's obsolete.

This means that EarthLink will have to find other sources of revenue and other businesses to enter. The trouble is that EarthLink has tried this once before when it entered into the citywide Wi-Fi market and invested in Helio. But now it's abandoned those initiatives. So what's next? It's hard to say. But one thing is certain. EarthLink will likely have a tough road ahead of it as bigger, stronger players like Google also move into new Internet-based markets.

AOL is raising the subscription fee by 20 percent for its low-cost dial-up service plan, a move that illuminates an awkward phase of its transition from an Internet service provider to an online media and advertising company.

The Time Warner division told subscribers last week that beginning July 27, it would raise its monthly dial-up rate from $9.99 to $11.99 per month. Subscribers who specifically sign up for a plan with limited technical support can keep the $9.99 rate, though, but they won't get phone-based help unless dealing with an Internet connection issue.

The move obviously could hasten the exodus of subscribers from AOL. But critics may be wise to take a deep breath before deriding AOL for a boneheaded membership disincentive for people who have abundant other options.

The change could wring more revenue from low-value subscribers, lower AOL's costs for those who stay at the $10 rate, and shuck the least active, least valuable AOL members. Overall, the rate change could play a small role helping make AOL's Internet access business look more appealing to would-be buyers as Time Warner seeks to "enhance...strategic flexibility."

Bye-bye subscribers
AOL lost 647,000 subscribers in the first quarter of 2008, dropping to a still impressive 8.7 million in the United States, but clearly the company hopes not to lose more.

"This plan is still a great value, saving you at least $3 to $10 per month over comparable plans from other major Internet service providers," the company said in the e-mailed notice, which touts features such as online storage, parental controls, and antivirus software. And AOL spokeswoman Anne Bentley pointed out limitations on various rival plans such as technical support fees and low prices that are introductory only or that are contingent on signing up for a full year.

But still, the move could indeed drive some subscribers away, either to broadband Internet service or to dial-up competitors such as NetZero, Earthlink's budget PeoplePC subsidiary, and Microsoft's MSN Dial-up, said Forrester analyst Sally Cohen.

"This really brings into question, for the price-sensitive consumers still on dial-up, 'Maybe we should just upgrade to broadband,'" Cohen said. "In some markets you can get DSL for cheaper than $12 a month."

Losing subscribers and their $120 a year is an obvious downside for AOL. But a more subtle problem is that losing subscribers could hurt the online business that's AOL's future. That's because AOL subscribers happen to own a lot of the eyeballs visiting AOL's Web properties and watching AOL-delivered advertisements.

"AOL's Advertising revenues associated with the AOL Network, in large part, are generated from the activity of current and former AOL subscribers," AOL parent company Time Warner said in a regulatory filing regarding AOL's not-so-hot first-quarter results. "Therefore, the decline in subscribers also could have an adverse impact on AOL's Advertising revenues generated on the AOL Network to the extent that subscribers canceling their subscriptions do not maintain their relationship with and usage of the AOL Network."

AOL is a significant business for Time Warner, but it's shrinking. In the first quarter of 2008, AOL generated $1.13 billion in revenue--10 percent of Time Warner's total but down 23 percent from $1.46 billion in the year-earlier quarter. It also generated $284 million in operating income in the first quarter, a 74 percent drop from $1.08 billion the year earlier.

AOL's plans
Protecting the dial-up business at all costs clearly isn't a great long-term strategy. More than half of U.S. homes with Internet access now use broadband, Cohen said, and clearly it's the wave of the future, and AOL knows it.

"AOL's strategy is to continue to transition from a business that has relied heavily on subscription revenues from dial-up subscribers to one that attracts and engages more Internet users and takes advantage of the recent as well as anticipated growth in online advertising," Time Warner said in the filing.

To help make the move, AOL is splitting in two, the access business such as dial-up and the audience business that includes the Web sites and advertising. All necessary decisions to split the two parts' operations and finances should be done by now.

"We're doing this for two reasons. First, to increase the accountability and operational focus of each of those businesses, and, second, and just as important, to enhance our strategic flexibility," said Time Warner Chief Executive Jeff Bewkes in a conference call after reporting last quarter's financial results.

So in short, AOL is packaging up the dial-up business for sale or some other significant change, and fine-tuning the subscription plans is part of an effort to make the package look as tempting as possible to a would-be buyer.

Subscribers still worth money
Given what AOL has built up over the years--still an impressive property if not a high-growth company like Google--it would be foolish to lose its link with people as they ditch their dial-up.

Those subscribers already have a potentially strong AOL affiliation through their own e-mail addresses and instant-messenger nicknames, not to mention a social network of sorts through e-mail address book and IM buddy lists.

So AOL would be wise to work hard to keep ex-subscribers part of the AOL network--not just with marketing but with education to help people figure out how to ditch AOL's all-in-one software for dialing up, checking e-mail, browsing the Web, and using AIM. It will take time for people to find and install the standalone version of AIM, to figure out how to use AOL's Web-based e-mail, and to download and print that picture of the grandchild.

If AOL handles the transition well, though, it could keep those AOL members and the revenue they generate even as dial-up fades into technology history.