Saving America Online

Maybe I was a bit harsh last week when I was reminiscing about the days when AOL was a classic Rule Breaker. After all, Time Warner's (NYSE: TWX  ) online service has lost only 2 million net subscribers over the past year. That's less than 10% of its tally of 22.7 million users, and the division was still good for $814 million in operating profits through the first nine months of the year.

So, no, I don't see AOL going on any endangered species list anytime soon. However, the four-step plan that I am humbly proposing today aims to allow AOL to win back its waning user base. Because if you go by the buoyant share prices of companies that swigged the dot-com Kool-Aid and lived to buy the next round, online magnetism is sexy again. Stocks such as Google (Nasdaq: GOOG  ) and eBay (Nasdaq: EBAY  ) have long legs and eyes that promise breakfast. AOL can't afford to play so hard to get.

Thanks to the weak U.S. dollar, America Online actually grew its revenues this past quarter. More dependably refreshing than the random whims of foreign exchange rates was the 70% surge in paid search revenue. That's why the real crime here isn't so much that AOL lost 2 million subscribers over the past year. It's that they were attached to roughly 4 million eyeballs.

Content. Services. Image. Value. These are the four areas that America Online needs to work on if it wants to strike a pose for next year's pinup calendar. Let's take a closer look at each one.

Content
If video killed the radio star, then we can safely say that broadband paddled the dial-up darling. The emergence of the World Wide Web leveled the playing field, while AOL's lack of a definitive broadband strategy allowed the competition to get a head start in a major lucrative arena. Last year's launch of AOL for Broadband had its heart in the right place as a premium rich media add-on service, but it lacked soul.

The one consistent complaint that I received after my article last week was from folks who felt that AOL jumped the shark when it blew it on the broadband front. From a conglomerate maze that found siblings AOL and Road Runner at odds with one another to the shameful denial of the service's ability to withstand the broadband migration, the end result is that it simply missed the boat. Once the Internet sped up, it made the AOL proprietary services and killer apps ordinary if not obsolete. Why would someone paying for a high-speed Internet connection pay even more to access AOL's content and community? Was offering JohnDoe87335@aol.com as an email address really the kind of flypaper that a company could hang its business model on? AOL became the buxom lass that became common -- and expensive -- at the dawning of the Wonderbra age.

Yet I don't think it was the consumer's reluctance to pony up for dueling online services that really put an end to the company's heady growth. We are slaves to leisure and communication. How many of us were paying for cable television 30 years ago? How many us were being billed monthly for our wireless phones 20 years ago? Few of us were paying for online services 15 years ago, just as we weren't budgeting for our TiVo (Nasdaq: TIVO  ) boxes 10 years ago. In a few years we'll look back at a time when we weren't paying for satellite radio either.

That last point is important because what is making satellite radio so indispensable isn't necessarily the dozens of commercial-free music stations or news and talk channels that can be duplicated elsewhere. It was when Sirius (Nasdaq: SIRI  ) locked up the exclusive rights to Howard Stern come 2006 that it truly set it and rival XMSatellite Radio (Nasdaq: XMSR  ) apart from free radio.

The same consumer who will pay for cable or satellite television over free TV -- and eventually satellite radio over free radio -- will pay for exclusive online content. So when AOL hooked up with Time Warner and acquired a fat dowry of content it should have been a happy day. AOL? You may now miss the bride!

How can the company that owns CNN not matter in the news space? How can the company that puts out Sports Illustrated not be a force to reckon with when it comes to online athletics? How can the corporate behemoth behind the Harry Potter movies and Bugs Bunny cartoons not matter to children or fail to cash in when they are older through Entertainment Weekly and its music roster?

Time Warner clearly has the content. The problem is that for the most part it is not exclusive to AOL. Pointing subscribers to the Internet for readily available content the way it has over the years is like a fish restaurant providing fishing lessons. No. That won't work. It can't be both a portal and the ultimate destination. AOL needs engaging proprietary content.

One can argue that the company has made headway on that front with features such as its Sessions@AOL in-studio musical recordings. The problem here is that folks aren't going to join a service under the assumption that their favorite bands may be ultimately featured. It's a solid concept, but stickier traps need to be set around it.

How about an engaging online soap opera -- one in which AOL subscribers cast votes that shape the direction the plot takes to the point where the experience is participatory, engaging and empowering? Time Warner knows what teens crave. It produces the O.C. prime-time serial, right?

How about a battle of the bands? I was hoping that AOL would have been the one to save MP3.com and its 250,000 unsigned musical artists, but it's never too late to start a new grassroots movement. AOL can create the kind of groundswell that can happen when users rally around their favorite local performers. Whether it is ultimately a farm club system for label projects or monthly compilations, if at the very root there is an interactive element where AOL subscribers feel as though they can have a direct impact -- think American Idol -- and do so only as AOL subscribers, isn't the viral magnetism obvious?

For more than a decade, AOL has housed active communities in niche areas where chats, moderated forums and sparse content unite like-minded strangers. Again, that won't cut it these days when flimsy communities double as revolving doors. Every single area can be stretched to make it addictive and distinctive from the rest of the Web's haunts.

Celebrate uniqueness (and I don't mean setting up an AOL subscriber awards show in various areas, though I'm warming up to that with every word I type in this sentence), and the crowds will follow.

Services
America Online's efficient mail reader got a welcome spam filter when it released AOL version 9.0. Yet still, over the past two years, the company has a net shortage of 4 million domestic subscribers. It's not the interface. When I hear the argument that someone won't leave AOL because they are attached to their screen names, I can't help but laugh.

In these golden days of green eggs and spam who wouldn't want to break away with a portable address book and start from scratch elsewhere? You also have a situation where there is just little pride left in tagging an @aol.com to the end of your name -- when it means being unjustly harassed in email circles and usenet groups. AOL needs to dust off some of the more attractive domains in its portfolio -- or acquire some -- and offer vanity email addresses. Not only would it give subscribers one more reason to stay and tap desired screen-name availability, but it would also help AOL more effectively target its ads by vanity preference.

While I covered creating an indie music portal, the same approach can be taken to everything from fiction writers, poets, and artists to photographers and filmmakers. While AOL has active areas and the occasional featured event, it needs to keep the areas active and injected with enthusiasm. Yes, the Internet is the great leveler, but sometimes it wouldn't hurt if AOL also handed out a soapbox lift to give its subscribers the opportunities needed to stand out and take advantage of the Internet's wide exposure.

AOL is doing it right by now integrating free spam filters, anti-virus software, and other tech enhancements to its service. It needs to flesh out more entertaining services, such as better blogs, fantasy sports, and automated homepage design offerings. It's not just because there are ads to sell on these pages -- though that is a welcome bonus. It is because free services that are superior to the WWW freebies help nail subscribers to their accounts.

Image
A company suffering from customer defections should never have an icon of someone running away as its mascot. That's just jumbo shrimp obvious. Yet when you reflect back on the action-packed televised ads that the company put out last year, perhaps Time Warner's own Marvin the Martian put it best: "Where's the kaboom? There was supposed to be an earth-shattering kaboom!"

You can't convey images of speed and multimedia glory when the public already knows about the cheaper ways in through more affordable ISPs. The marketing message needs to preach the proprietary -- and why the Internet experience is incomplete without it. Whether you want someone to piggyback AOL to existing access or to make it the exclusive gateway, AOL needs to go where others can't follow: Inside.

Value
If sites such as Yahoo! (Nasdaq: YHOO  ) and Google value traffic so much that they make access to most of their features free -- and are rewarded with sparkling high-margin income statements that vindicate this approach -- AOL is not doing itself any favors as the priciest home on Retroville's dial-up block. Free AOL? Are you crazy? There is a gargantuan cost difference between simply putting up a site on a sea of servers and the expensive overhead of setting up an ISP network. But the point is that AOL can and should reposition its pricing position. Until the proprietary content and services are obvious and valued by the market, the slow creep out the door will continue, with little hope of not losing another two million users by this time next year.

The argument that AOL can afford to charge so much because its user base is loyal is so 2002. This sand castle on the beach has had two years of waves crashing in, so what's the point in realizing that content is king if your castle has eroded?

One of the goals of our new Rule Breakers newsletter -- and you really should consider taking it for a spin under today's free-trial offer -- is to seek out companies that are shaping the future by not conforming to today's standards. Those are the stocks that should ultimately provide the richest rewards. AOL's flaw is that it became too complacent. Well, enough of that. Tomorrow is calling. Is AOL hungry enough to answer?

Longtime Fool contributor RickMunarriz really has been an AOL subscriber for the past dozen years. He is also part of theRule Breakersnewsletter analytical team and he does not own shares in any of the companies mentioned in this story.


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