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AOL has warned that the "significant" erosion of subscriber numbers looks set to continue as the Internet giant faces stiffer competition from broadband and cheaper dial-up services.

In its annual report filed with the US' Securities and Exchange Commission (SEC) AOL reported that the number of AOL subscribers in the US fell by 2.2m in 2003, from 26.5m at the end of 2002 to 24.3m at the end of 2003.

AOL blames the decline on an exodus of punters from its service and poor uptake to marketing campaigns, as consumers opted for rival dial-up services or shifted to broadband instead.

Said the company in its report: "The AOL narrowband (or dial-up) service experienced significant declines in US subscribers, which is expected to continue. Driving this decrease was the continued industry-wide maturing of the premium narrowband business, which is expected to continue, as consumers migrate to high-speed broadband or lower-cost dial-up services."

AOL has developed several new packages, in a move to reduce reliance on traditional narrowband revenues. It has introduced a Bring-Your-Own-Access (BYOA) broadband service - AOL FOR BROADBAND - which lets users who get broadband from cable or telephone companies sign up to AOL's content service for $14.95 a month. And earlier this year it unveiled a new lower-cost, dial-up ISP - Netscape Internet Service - to compete at the bargain basement end.

Snag is, these are generating less revenue than AOL's traditional all-you-can-eat package.

As a result, the Internet company warned that the movement towards AOL broadband services "could negatively impact future results of operations due to lower average pricing on broadband services than for narrowband services."

Last year, a report by Strategy Analytics predicted as much saying that AOL could lose $1bn in revenues by 2005 because of the growth of broadband in the US.

In its report Can AOL Bridge the Broadband Gap?, Strategy Analytics argued that AOL would lose out financially as the dial-up market - which it dominates - shrinks.

Even if punters sign up to AOL's "Bring Your Own Access" scheme, the company will get less revenue.

"The combination of a shrinking dial-up market and the diminished margins produced by broadband subscriptions revenue could cost the company nearly a billion dollars by 2005," said the Strategy Analytics report.

Elsewhere, AOL's report to the SEC revealed that subscriber numbers in Europe have remained flat at around 6.4m as falls in Germany and France were offset by a growth in punters in the UK.

The average monthly revenue per user in Europe jumped from $14.88 in 2002 to $19.13 ,as a result of exchange rate fluctuations and increased tariffs. ®

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