AOL's Unhappy Holidays

If the familiar "You've Got Mail" arrived in pink and made you shudder, you're likely one of the unfortunate 450 California-based employees being let go by Time Warner's (NYSE: TWX  ) sluggish America Online subsidiary.

While the layoffs are modest relative to the company's nearly 20,000 employees, the fact that we're talking subtraction here at all is significant. Other Internet service providers are growing. Word of layoffs at AOL comes a day after EarthLink (Nasdaq: ELNK  ) announced that its organic growth would result in 175,000 new subscribers. Back in October, discounter United Online (Nasdaq: UNTD  ) posted a 47% increase in paying monthly subscribers.

So what's eating AOL?

After years of heady growth, the service has lost subscribers to cheaper dial-up providers and a growing fleet of high-speed broadband providers. Ironically, while the company had embraced the move to pricier cable and DSL subscriptions, adoption of the speedy connections has actually backfired.

The company's user-friendly interface and quick-loading content were big advantages in the dial-up days, but with speed leveling the playing field, AOL is losing the battle on price. When you have Wal-Mart (NYSE: WMT  ) offering service for $9.94 a month, AOL has a hurdle to clear at $23.95 a month.

AOL has rolled out bargain-priced standalone access, but it's maintaining its premium status essentially by bulking up on proprietary content. Good move. Time Warner's media empire was built for broadband and exclusivity is a way to earn brand loyalty.

Moreover, AOL must never forget that a user who is willing to pay a premium for access is probably a more attractive target for advertisers. It can't afford to drop the ball on customer service, software feature upgrades, or content. It'll need all that to start growing its subscriber base again.

Some pretty amazing things will happen when that day arrives. For starters, AOL will once again be a major factor in Time Warner's plans for global domination. And its workers, presumably, will receive better holiday news.

Will AOL ever win back the love of Time Warner? Was the merger a mistake for America Online or Time Warner? Both? All this and more -- in the Time Warner discussion board. Only on Fool.com.