08/09/2006

Analysts see AOL's new strategy as long overdue

By George Gill

AOL's announced plan to change its focus to online advertising revenue from dial-up subscription revenue is a necessary step to remain competitive in a market that's moving away from dial-up access to broadband.

On Aug. 2 the company outlined plans to offer its software, e-mail and other products for free. "We'll now be able to maintain and deepen our relationship with many more members who are likely to migrate to broadband," said AOL Chairman and Chief Executive Officer Jonathan Miller. The company also said it will eliminate 5,000 positions worldwide over the next six months as part of the restructuring.

Bruce McGregor, senior analyst, digital home services, for Sterling-based Current Analysis, said the change in focus was a long time coming.

"I believe AOL, to attract broadband users, had to go in this direction and create more of a portal model," he said. "They had to tie a lot of it to advertising revenue versus subscriber revenue."

Competitors like Yahoo, Google and MSN offer many similar services for free, he said, so it would make sense for AOL to do the same, especially if it is interested in going after online advertising.

McGregor added that he can see why AOL has held off on making the change.

"They have this large subscriber base in dial-up users paying a premium price for it," he said. "That has significantly dropped off in the last couple of years. Now it looks like they're trying to go full speed with this new direction."

He said AOL in some respects is playing catch up, because it has lost many subscribers and the majority of people still view AOL as a "pay site."

"The Internet has progressed and moved on with social networking, the popularity of sites like Myspace, and the emergence of online video with sites like YouTube," he said. "People have found alternatives out there to find these features that AOL is starting to develop. So AOL is now tasked with a way to get these users to come back."

He said much of AOL's success in the 1990s came from the lack of affordable broadband access.

"In the beginning of the Internet boom, dial-up was it," he said. "Broadband was $50 a month or more. AOL really captured entry-level users, gave them an e-mail address, and was relatively easy and intuitive to follow."

He said today's Internet users are more savvy, want faster Internet access connection speeds and are more aware of all the other services available on the Web, many of which are free.

He said AOL can still be relevant in the online video arena by making it easier to navigate and find things.

"If they can find a way to make looking through online video easier to navigate and maybe where you have preferences to find content you want instead of having to hunt for it on the Web, that would appeal to a lot of people," he said. "But a lot of competitors are already doing that."

McGregor said it will be interesting to see if AOL leverages the fact that it's part of Time Warner by trying to get some exclusive Time Warner video content for its site.

He said another growth area in digital home services that AOL could try to address is the ability to integrate video content so that it can seamlessly move from the PC to the television.

"That's kind of the next generation of things where you have digital content, and you can put it on any device in your home," he said.

Stan Schatt, a vice president for ABI Research, said he thinks AOL's announced change is the right move at the wrong time.

"I actually think it may be too little too late," he said. "It's pretty clear from the decline in subscribers over the last few years."

He said that while it makes sense for AOL to move toward an ad-supported route built around people using their own broadband access, it's doing so in a market where many other competitors have already done the same thing.

"One problem is that while they've been dithering, in effect, Google has been very, very strong and built an incredible infrastructure," he said.

Schatt said AOL has too often been late in changing its strategies to succeed in the marketplace.

"They were late going to broadband, they've been dial-up forever," he said. "And they used the same old marketing over and over again. You can only provide free CDs so many times before people just throw them away. And, it's pretty clear the marriage between AOL and Time Warner didn't work."

Schatt said that in spite of all that, there's still a place for AOL.

"If you look at Internet penetration and growth, we still have a rather substantial boom of people who are late to the Internet," he said. "We're talking about a lot of people who may be elderly, or may not be computer-friendly or may be phobic about computers."

He said such people could still benefit from the user friendliness of AOL.