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AOL Wants to Be Free

America Online is paying the price for falling behind in the Internet revolution. According to this morning's Wall Street Journal, AOL is considering forgoing billions in subscription revenue by allowing households with their own broadband connections to access the service for free.

The Time Warner (NYSE: TWX  ) subsidiary hasn't lost its mind -- just its stronghold. Subscriber count peaked at 26.7 million in the third quarter of 2002. It has since dipped during every single quarter, now resting at a mere 18.6 million accounts. The market has decided that attaining a high-speed Internet connection makes the user-friendly AOL interface obsolete, and AOL seems to agree.

To be fair, AOL hasn't helped deflect the knocks. It has been gradually chipping away at many of the offerings that made it indispensable to those who outgrew AOL as the Internet on training wheels. Once the service ditched its proprietary newsgroup reader and its fast-loading message-board platform, I was surprised at how little of my online time was spent on AOL itself.

The saving grace for AOL, and for Time Warner, has been a surge in online advertising revenue that has helped soften the blow of misses elsewhere at the media giant. Time Warner doesn't want to lose that lucrative revenue stream.

Obviously, charging only for its dial-up accounts will ultimately be a dying business for AOL. If the "people familiar with the matter" cited in the article are right, we're essentially seeing the transformation of AOL from a subscriber-fed access site to a free membership-based portal. The access game will then go to the remaining players like Earthlink (Nasdaq: ELNK  ) , United Online (Nasdaq: UNTD  ) , and the various other cable and DSL Internet providers.

AOL is awakening to reality, but this doesn't mean it's got a lifeboat waiting. Free or not, it still needs compelling reasons for folks to congregate at Free email isn't much of a lure, since Google (Nasdaq: GOOG  ) , Yahoo! (Nasdaq: YHOO  ) , and Motley Fool Inside Value pick Microsoft (Nasdaq: MSFT  ) all have great free offerings that lack the newbie stigma that's always dogged the AOL domain. Proprietary content will help -- and Time Warner's got plenty -- but that alone won't be enough. AOL needs to invest in killer applications and viral attractions that will be traffic magnets. In its current form, the service is a hard sell, but it'll be just as hard to give it away. The competition is too smart to let that happen.

Getting cheaper, AOL? Fine. Just make sure you get smarter, too.

Time Warner has been a recommendation in theMotley Fool Stock Advisornewsletter service for years. See what other top stocks made David and Tom Gardner's list with a free 30-day guest pass.

Longtime Fool contributor Rick Munarriz can be cheap sometimes, but he recognizes that some free things cost more than one bargains for. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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