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AOL hovers on historic decision to quit the ISP market

Considers radical change

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AOL had recently tried to do a little of each, confining subscription only services to a smaller and smaller subset of its services, and driving advertising up on the free services, and indeed AOL's advertising revenue has grown up 26 per cent to $392m in the first quarter, but this is little more than 20 per cent of the total AOL revenue at present.

While detractors may point out that both Yahoo! and Google grew their ad revenue far faster, this is all about deciding the exact moment in which to change the corporate culture at AOL.

Big ad spends that sought to drive up subscriptions, at a time when they were falling does something to the staff, it demoralises them, making them believe that their management are inept and their product inferior. That may change overnight.

Certainly, we saw that AOL pulled out of its Upfront TV advertising agreements last week, and immediate savings were dramatic. And revenue falls may not be any more precipitous than previous, since dialup will remain paid and AOL can continue to charge money to anybody that simply fails to notice that the rules have changed and they can now get most of what they get from AOL, for free.

But even here it must be careful. Loyal customers ought to be told officially that services like email are going to be free, and no risk should be taken of them moving from loyal customer to a disillusioned malcontent, through mistreatment. The number of ex-AOL customers that are already bad-mouthing the organisation is already too high given its recent customer care disaster.

Analyst estimates vary but some reckon that an aggressive move by AOL, including rapidly upgrading dial up customers to any number of broadband suppliers where they can keep their AOL email address, could cut revenues by half at AOL this year, and take it from a cash cow to little more than break even.

But the move from collapse, back into growth could enliven the culture at AOL, although a huge number of personnel will have to go. Anyone that doesn't buy into the program has to be cut out and many of the internal services for managing subscriptions etc.. will simply evaporate and the company could run very lean and mean.

Can it rejuvenate its brand? Other companies have.

What needs to stop is the constant bickering that will have been going on internally about which services should be free and which paid. It needs to change or stay the focused on paid services, what it can't do is dither somewhere in the middle, supporting two separate cultures.

After all, AOL will now go head to head with investor and partner Google, and it won't do well by being timid and relying on Grandma's email dial up subscription.

The truth is at the first sign of overall revenue growth, which should be after the third quarter next year, AOL will become worth a whole lot more and that is really the trigger that Miller should be pushing at the Time Warner board.

The company was bought by AOL and then went on to make the largest ever loss in corporate history, but writing off all of its goodwill. This should be about share valuation long term and the board, if it is acting in the interest of shareholders, should nod this through.

AOL says it has captured around 35m web visitors since it opened its new free site at AOL.com. This sounds like a large number, but it isn't because it's over a period of months and each of these casual free visitors spend far less time on the site, so it is serving far less advertising impressions.

In total during May, AOL served 14.8bn internet pages which is a 27 per cent drop from a year earlier, at a time when other web portals are reporting rising traffic.

Finally, according to UK press reports, a new front runner emerged in the race to acquire AOL in the UK, with France Telecom said to be wanting to add AOL UK to its Orange broadband service, for around $1.2bn.

The list of bidders is believed to include British Telecom, Carphone Warehouse, the mobile phone retailer and a recent entry in the broadband market, Telefonica's mobile phone service O2, BSkyB, and Orange, with broker Citigroup saying the deal is likely to be agreed by the end of July. AOL Germany and France are also thought to be on the block.

Copyright © 2006, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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