Ah, AOL, long a major difficulty for parent company and media conglomerate Time Warner (NYSE:TWX). Could it be that maybe it's turning the corner now that it's been offering its content-rich service for free? After listening in on its presentations at Merrill Lynch's and Goldman Sachs' conferences, it sounds to me like AOL's new motto may be: "You've got optimism!

Short-term cause for optimism
So far, AOL's plan to offer its service for free seems to be working better than even the company had anticipated. Apparently, an impressive number of people are coming to AOL now that the subscriber walls have fallen. At the Merrill conference, chairman and CEO Jon Miller said that while August is usually a down month for AOL, this August, usage clocked in with a 5% increase on a sequential basis. (Indeed, at the Goldman conference, it came to light that 40% of the people coming to AOL during the 6 weeks ended Aug. 2 were newbies who weren't paying subscribers before.)

However, Miller pointed out an obvious issue here (to his credit, he repeated it many times for emphasis): The preliminary results are only 30 days into this initiative, folks. Since the data simply doesn't span a very long period of time, investors might want to consider whether this is just a matter of novelty at this point. (Retailers' same-store sales figures only count sales at stores open for more than a year, because any grand opening is going to elicit much more interest and curiosity at the onset, after all. Mightn't it work the same way with AOL's freebie offering? I guess we'll find out.)

Reduce the AOL drag
Here's an interesting talking point, too: Miller pointed out that now that the company's no longer focusing on peddling the Internet access business, it's going to save "hundreds of millions" in subscriber acquisition marketing. (I'm sure there are more than a few of you who breathe a sigh of relief that you no longer get those AOL come-on discs in snail mail anymore. Yes, those days have come and gone now that Internet adoption, not to mention broadband adoption, is maturing.) Time Warner investors can hardly complain about the idea that AOL will be less of a drag on profitability when it saves that kind of money. Miller said that such spending cuts will reduce operating costs by $1 billion by the end of 2007.

On the other hand, Miller waxed enthusiastic about growth in advertising money. I can't help but wonder, though, what's going to happen if the ad market gets less "frothy" (a term Blue Nile (NASDAQ:NILE) CEO Mark Vadon used earlier this year to describe how expensive keyword advertising had become). If we experience a recession, as some think we might, it stands to reason that many companies may cut their advertising spending -- online, offline, or otherwise. And that could hurt not only Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO) (in fact, Yahoo! recently said it has experienced a trend of several weeks worth of slowing ad revenues in certain categories), but also AOL's nascent efforts to monetize a newly free, content-rich community through advertising revenues.

At the Goldman conference, president and chief operating officer Jeff Bewkes said, "In the near term, the Company is transforming the AOL business from a narrow band access business to a broadband portal and content provider while also leveraging its vast library of content to drive growth via new digital formats and distribution channels." That's about the size of it, with the important caveat for this next phase being free. But it's certainly not like AOL doesn't have a lot to offer now that it's no longer locked behind a tolled wall.

A Web 1.0 in hiding?
Bewkes also threw the term Web 2.0 into the speech, which struck me as a bit disjointed when it comes to the actual definition of Web 2.0. (Web 2.0 is arguably a bandwagon buzzword. The term usually refers to companies that utilize user-generated content and network effects, but it's been suspected that more companies nowadays use it more for marketing jargon.)

Although it's perfectly acceptable to speculate on whether AOL could leverage its large community in Web 2.0 fashion, Bewkes' talk of the importance of big brands in the same breath as Web 2.0 seemed to be a bit of a disconnect when most Web 2.0 players seem to be more about the democratization of content than the fascination of big media brands. Don't get me wrong, I'm not saying that some of Time Warner's most well-known brands -- say People and CNN, just for starters -- aren't still formidable forces. But I am saying that where the new media opportunities are in driving user-generated and interactive content, AOL has for years been somewhat fixated on an old way of doing things.

Fool full report
In analyzing this presentation, I had to try to be as Foolish as possible and add a grain of salt here and there. Of course, a presentation to Wall Street is going to be optimistic, and there are some reasons to believe that AOL may be on the cusp of getting its act together after the mistakes of the past. But I do still believe there are many challenges ahead, since AOL faces such fierce competition when it comes to where Internet users get their entertainment, content, and community, not only from other portals and search engines but also from newcomers like News Corp.'s (NYSE:NWS) MySpace, Digg.com, and YouTube.

Investors might wonder whether AOL's preliminary success in roping new users (or maybe prodigal AOL users who liked the service but hated the dial-up and the fees) might just be a novelty. But maybe the complementary elements of the two companies are finally coming to fruition, especially given more and more signals that Time Warner's seeing the importance of focusing on its strongest media offerings and pushing them into digital distribution. After all, it's long been clear that AOL as a content portal could have a lot of potential, given Time Warner's well-known and established brands. If management finally understands how it can make use of the new Web mentality, investors may very well be thinking that it's better late than never.

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Alyce Lomax does not own shares of any of the companies mentioned.