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