Time Warner reinvents AOL to take on Google
By Stephen Foley
Time Warner has ripped up the old business model
for AOL in a last ditch attempt to save the Internet pioneer it
merged with at the height of the dot.com boom.
AOL will stop trying to sell Internet access and
instead turn itself into a pure online media business, dependent
on advertising revenue and competing directly with Google, Yahoo
and Microsoft's MSN.
The bold move comes as AOL is haemorrhaging more
than 10,000 subscribers every three months. The 17.7 million that
remain will be told that, from next month, they will no longer have
to pay for e-mail, chat and entertainment.
The adoption of the plan, rubber stamped by Time
Warner's board last week, is a triumph for Jeff Bewkes, the chief
operating officer who assumed responsibility for AOL at the start
of the year. Its success or failure will determine whether he stays
as favourite to succeed Dick Parsons as Time Warner chief executive.
AOL lost 976,000 subscribers in the second quarter
of the year, as dial-up subscribers switched to the faster broadband
services offered by rivals and content-only customers decided that
access to an AOL e-mail address was no longer worth the money.
But Mr Bewkes said the new strategy means there
is now "no reason for anyone to leave AOL" and from now
on "we are going to stop sending our members to our competitors".
Wall Street had begun to fear that there might
soon be nothing left of the company which first encouraged millions
of Americans to get an internet connection.
It was at the height of its pomp in January 2000
when it stunned the world by announcing a $350 billion merger with
Time Warner. Many parts of the latter's media empire seemed decidedly
"old economy" at the time, but it is the cable television
assets that are currently blooming while AOL has been a drag on
Time Warner shares.
Carl Icahn, the billionaire investor, spent last
year harrying the board to get them to sell it or break it up. AOL's
European operations are on the block, with deals that will see Time
Warner continue to provide content expected by the autumn.
Mr Bewkes explained how he persuaded the board
that it was time AOL maximised the number of people visiting its
sites, and switched to the advertising-driven model preferred by
rivals. "We would be giving up 30 billion to 40 billion page
views this year if we didn't do this," he said.
"That is the equivalent of 10 per cent of
Yahoo, 20 per cent of MSN, a third of Google." The plan is
bold because it will immediately wipe out subscription revenue from
up to 6.2 million content-only subscribers.
And its financial impact is highly unpredictable
because it remains to be seen how quickly the remaining 11.5 million
dial-up customers abandon AOL in favour of broadband services from
rivals.
Essentially, he is banking on $1bn in cost savings
from marketing and supporting dial-up internet access, and then
betting that a big marketing splurge ("You've got mail –
for free") will attract a whole new set of Internet users to
AOL's services, enabling the company to attract advertising on its
sites.
In an optimistic sign yesterday, the company said
AOL's advertising revenue rose 40 per cent to $322m.
And Mr Bewkes echoed the rationale of the original
2000 merger - widely doubted by Mr Icahn and others - that there
will be synergies to exploit between a revived AOL and the rest
of the Time Warner empire. "AOL's extra traffic provides an
audience for all the digital product coming out of the networks
and publishing sides of Time Warner," he said. (THE INDEPENDENT)
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