AOL Accelerates Move to Ad-Supported Portal

AOL is in the midst of a “strategic review,” with one potential outcome being a move to abandon subscription fees on some of its services for users with existing broadband accounts.

Sources inside AOL have confirmed that executives are indeed entrenched in internal discussions to accelerate AOL’s move from dwindling dial-up access provider to growing ad-supported media company.

An official AOL spokesperson declined to comment, but a source familiar with the negotiations told ClickZ that discussions are underway to determine which of its premium services would be offered for free, such as email, security software or parental controls.

E-mail is a likely candidate, since a user in AOL’s email environment is more likely to click an ad or link to a page on AOL’s site, allowing the company to sell more ads on those pages. Keeping email users to boost pageviews is a major priority for AOL, according to the source. AOL already offers free email through AIM, called AIM Mail, but the move now being considered would free addresses.

The plan would aim to ease current AOL dial-up users to broadband by letting them keep using the same software to access email and the Internet, and might lure some former subscribers back into the fold, according to the source.

AOL has already taken steps to reduce marketing for its dial-up service, and would likely scale back even further. It would also likely eliminate much of its customer service personnel, creating more cost savings.

Former Merrill Lynch Internet analyst Henry Blodget believes the plan has a one in three chance of working.

“This is a scary, but smart, move. AOL is between a rock and a hard place. If it does nothing, it dies slowly. If it makes moves like the one described above, it deeply wounds itself but hopes that it will recover and have a long-term future. Neither option is appealing. But only one — the latter — gives the company a chance of being around for the next few decades,” Blodget wrote in his Internet Outsider blog.

Blodget adds that the company must do more than “cut and pray,” instead reworking its email software, developing a clear portal identity and target audience, and finding a niche to play in against entrenched rivals.

AOL has been losing dial-up subscribers to rival broadband providers for years. It has taken steps to lure those subscribers to keep their AOL services for a fee on top of the broadband access fees, either separately or as a bundle with preferred providers like Time Warner Cable.

The company began a marketing push this spring to get more if its dial-up customers to sign up with one of its broadband partners, but AOL will not release results of that promotion or break out broadband numbers from its stated 18.6 million overall subscriber figure.

AOL has been ramping up its efforts to attract advertising, especially since the re-launch of a year ago. That move was the first step in the process to make AOL a portal on the “open Web” instead of a “walled garden”.

In 2005, AOL saw a $333 million increase in ad revenues, with a $722 million decrease in subscription revenues. In the first quarter of 2006, that trend continued, with an $81 million gain in ad revenues and a $195 million decline in U.S. subscription revenue

Subscriptions still brought in more than $7 billion of AOL’s $8.3 billion last year, dwarfing its $1 billion in advertising revenue.

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