AOL Is Free as a Bird

Change is afoot at Time Warner (NYSE: TWX  ) after another uninspiring quarter for the media giant and continuing defections at its America Online service. Strength in the company's cable and network business marginally offset declines at AOL and Time Warner's publishing division. Add it up, and the company produced $0.20 a share in adjusted profits, with the top line inching 1% higher to $10.7 billion. Analysts were expecting $0.19 per share in earnings on revenues of $11 billion.

The major announcement is that Time Warner is finally confirming rumors that were first reported last month: AOL will become a free service for broadband users who bring their own Internet access.

AOL will provide free access to its user-friendly connectivity software interface, and email accounts for members who don't require dial-up connections. New freeloaders will be welcomed with open arms, and there is always room for the prodigal sons and daughters at the new freebie table. If you are one of the millions who've bailed on AOL over the past two years, AOL is allowing you to reactivate your dormant email address. You might argue about the value of "@aol.com" as a desirable handle (I'm happy with it), but we can probably all agree that AOL is making a bold move in tearing down the turnstiles around its walled community.

At this point, AOL has little choice. Since its domestic subscription count peaked at 26.7 million in the fall of 2002, its headcount has fallen every single quarter. This morning, we learned that AOL is down to just 17.7 million subscribers to its flagship service. The salmon fighting that current is online advertising. Thanks to Google (Nasdaq: GOOG  ) and the company's own ad-selling efforts, Internet advertising soared 40% higher, despite the perpetual cancellations.

Everyone knows that AOL blew it. It was too slow to embrace the broadband migration, but it also failed the faithful by doing away with many of the features that made AOL a service worth paying for -- like its proprietary newsgroup reader, quick-loading discussion forums, and a vibrant collection of community leaders. It became less unique, and by pushing its paying subscribers more and more toward the Web to retrieve content, AOL effectively removed its own training wheels, letting longtime members pedal elsewhere.

AOL dealt itself the bad hand it's currently holding; now it has little choice but to go all in. In that sense, Time Warner's online arm has served itself well. Over the past year, AOL has been beefing up its AOL.com portal. It's the right way to go, given the irreversible course of the company's past missteps.

Instead of competing against nimbler players like Earthlink (Nasdaq: ELNK  ) and United Online (Nasdaq: UNTD  ) , AOL is now fighting for freeloading eyeballs against the big guns of Yahoo! (Nasdaq: YHOO  ) , Microsoft's (Nasdaq: MSFT  ) MSN, and AOL minority-owner Google. The new AOL is even taking on eBay's (Nasdaq: EBAY  ) Skype by promising its members local phone numbers with unlimited incoming calls.

The new AOL has an uphill battle, with a brand to rebuff and consumers to win back. It's ambitious. It's risky. And it's better than dying slowly.

Time Warner and eBay are been longtimeMotley Fool Stock Advisorrecommendations. Microsoft is anInside Valueselection. You can check out our entire suite of newsletters by clicking here.

Longtime Fool contributor Rick Munarriz has been an AOL subscriber since 1992, but he doesn't own any of the stocks 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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