AOL Drops Subscription Fees

Time Warner confirmed today the persistent rumors that it will eliminate subscription fees for broadband users of its services in hopes of keeping users on its Web sites and increasing ad revenue.

Beginning in September, broadband users will no longer have to pay for AOL’s software, including its e-mail client, security software, and parental controls.

The company believes that by lowering the barrier to using its service, it will encourage existing users to spend more time with AOL’s software and on its Web sites. Those increased pageviews will increase its ad inventory, including ads AOL began placing in its e-mail client earlier this year.

“AOL members are very valuable to our advertising business,” Jeff Bewkes, Time Warner president and COO, said today on a conference call explaining the changes. “If we didn’t change this, we’d be giving up 30 to 40 billion pageviews this year. Our members don’t want to leave us. When they leave, the number one reason is price. Now we’ve fixed that problem and we’re going to stop sending our members to our competitors.”

People will continue to be able to use AOL’s instant messaging, AIM Phoneline and social networking applications free of charge. Existing users, as well as those who left AOL within the past two years, will be able to keep their AOL screen names. In coming weeks, AOL will update its software and introduce new products in areas like safety and security, storage, personalized e-mail domains, video and search.

AOL will continue to offer its dialup service, but will no longer aggressively market it. That will also allow the company to continue scaling back its marketing and customer service operations, and save more than $1 billion by the end of next year, Bewkes said.

It will also allow AOL to co-market its service with Time Warner Cable and other broadband providers without worrying about competitive issues or misaligned goals, said Bewkes. Past agreements with access providers were structured so that offering AOL’s service to their customers cost the provider money, or competed with other offerings, he said.

Now, offering AOL to customers will be a value-add that will help them enroll more “triple-play” customers, who subscribe to cable TV, Internet and VOIP services. In addition, the pool of AOL’s dialup users is the perfect target audience for these providers to go after, Bewkes said.

While media reports have estimated the move will negatively impact AOL’s revenue, the company insists that is not the case. Any revenue lost from subscribers will be more than made up in additional ad sales, according to Jonathan Miller, AOL’s chairman and CEO.

“Our goal is to drive usage for our monetization platform,” Miller said. “We’ve made process improvements, targeting improvements and ad-serving improvements, and have a better sales organization. We expect to see revenues improve.”

The move is seen by many industry watchers as a necessary attempt to save AOL from a slow death as it continues to lose dial-up subscribers to broadband providers. In the U.S., AOL has lost 3.1 million subscribers in the past year, ending June with 17.7 U.S. members. In Europe, it had 5.6 million members, a loss of 571,000 over the year before.

AOL had partnered with several cable operators to bundle its product with their broadband services, but it is not believed those offerings performed up to expectations. Time Warner does not break out numbers of broadband or dial-up subscribers from its overall member counts. AOL also offered a $10 monthly plan for broadband users to keep using AOL’s software and services, but many users balked at paying the additional fee on top of their broadband access costs.

AOL has been ramping up its efforts to attract advertising, especially since the re-launch of AOL.com 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 half of 2006, that trend continued, with a $210 million gain in ad revenues and a $383 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.