Is Time Warner
The Wall Street Journal first reported on the potential move by AOL, citing internal sources. This week, the Journal is back with more details on what Time Warner expects to lose along the way.
Under the ambitious plan, paying subscribers would tumble from 18.6 million as of the end of the March quarter to roughly 6 million dial-up members by the end of 2009. With that grim scenario, annual profits from subscription revenue would be cut in half from $1.6 billion.
The upside of downsides
Would this be disastrous for AOL? Not necessarily. Time Warner expects to offset the slide with the online advertising possible as traffic spikes under the free AOL model. Through volume gains and operating efficiencies, operating margins in the ad space may go from 17% today to 42% in three years.
It's easy to see where Time Warner gets its inspiration. Google
Time Warner is no Google, but we also can't dismiss reality here. This move may slash subscription revenue, but it was bleeding slowly anyway. In the fall of 2002, America Online's subscriber count hit 26.7 million. In every passing quarter, there are more users going through the exit turnstiles than new ones hitting the "Welcome" screen.
Better late than clever
It's easy to argue that AOL could have avoided this kind of predicament by making its service more valuable to the growing number of high-speed Internet users. Somewhat inexplicably, AOL shooed away loyal customers by getting rid of things like its proprietary newsgroup reader, and eroding the value of its once-active discussion boards by booting community leaders and turning to a slower Web-based platform.
Why stick around? AOL's cupboard had grown bare. By sending customers to the Internet for answers and solutions, it helped grease its way toward obsolescence.
You didn't see this kind of calamity at access specialists like EarthLink
Like Compuserve, Prodigy, Delphi, or Genie, AOL is simply becoming the latest online service to cave in to its own irrelevance. Pity, especially because AOL's wounds are so clearly self-inflicted.
That makes the move to a free format a little troubling. Just because AOL can't convince its members to pay for its service doesn't mean that it will be able to give it away, either.
Cost-cutting initiatives make developing the next killer app -- or improving AIM to fortify the platform -- unlikely. Cash-rich companies like Google, Yahoo!,
Besides, history has shown that fast-growing models like MySpace, YouTube, or Digg tend to come from unproven upstarts.
Disco Night at AOL
AOL is that once-popular nightclub that has been passed over in time and hipness. Now it has to justify that it's still a place worth going to.
Just because it has Google as a minority partner doesn't mean that the Google magic will rub off. Even with Google nudging its growing base of visitors AOL's way, it's going to be up to AOL to keep them there.
The attitude is going to have to change. Stagnancy is not the right recipe, and I hope Time Warner realizes that tearing down the wall doesn't mean that bodies will be migrating freely both ways. AOL's acquisition of MapQuest nearly seven years ago should have made it an eternal leader in online road maps, but it can't hold a candle to Google Maps these days. And when's the last time you used AOL's MovieFone service?
AOL can't make it as a free service with the same approach that had it floundering as a pay service. It's as simple as that. AOL can be free, but it can't afford to be cheap.
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 the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.