updated 7/6/2006 12:58:53 PM ET 2006-07-06T16:58:53

Time Warner Inc.’s AOL LLC online unit is considering giving away more of its services, including e-mail, to customers who already have a high-speed Internet connection, a person familiar with the discussions said Thursday.

Under one proposal under consideration, AOL would no longer charge subscription fees to users with high-speed Internet access or dial-up service from another provider. AOL customers with dial-up Internet access through AOL would still have to pay as much as $25.90 a month.

The person familiar with the talks said the proposal is an outcome of a major strategic review at AOL over the past several months. The idea, the person said, is to find additional ways to expand AOL’s advertising opportunities as AOL’s subscriber base continues to shrink.

The Wall Street Journal first reported on the discussions Thursday.

Over the past year and a half, AOL has been making more of its articles, video and other services available for free on its ad-supported Web sites. But some features, including e-mail with an AOL.com address, remained available to paying subscribers only.

AOL offers free e-mail services, but only through its Web site and with an AIM.com address. AOL offered to forward former subscribers’ AOL.com e-mail to AIM accounts, but many didn’t bother because they had to give friends new e-mail addresses anyway.

If the proposal is adopted, former subscribers would be able to keep their AOL.com address and use the AOL software they have been accustomed to using.

Details still to be worked out include whether AOL also would give away security and parental-control software it now offers as part of the subscription package.

AOL had 18.6 million U.S. subscribers as of March 31, a drop of 835,000 from the previous quarter and down from a peak of 26.7 million in September 2002.

Rob Enderle, an industry analyst with the Enderle Group, said AOL needs to avoid becoming a company “caught in the middle” — trying to juggle both a paying subscriber base and a free, ad-based model without doing either well.

AOL must accelerate the shift to free, he said, to become closer to what its rivals like Yahoo Inc. already do, even if it means painful cuts in revenues in the short run.

“By doing this they are certainly going to take a bigger hit but they may be able to turn the company to growth,” he said. “A smaller company that is growing is better than a larger company slowly in decline.”

According to Time Warner’s regulatory filings, AOL subscriptions generated $1.5 billion in the first quarter of 2006, contributing to the unit’s profit of $269 million. But that’s still a 13 percent drop in subscription revenue from the same period last year.

Advertising generated less revenues — $392 million in the quarter — but that was an increase of 26 percent.

The Journal said that nearly one-third of AOL’s subscribers already have high-speed Internet access and that AOL expects that 8 million of its existing dial-up customers would jump on the new offer, at a cost of as much as $2 billion in annual subscription fees.

Lost revenue could be offset by lower expenses, including layoffs in the company’s marketing and customer-service departments.

Just two months ago, AOL announced about 1,300 layoffs in customer service, or roughly 7 percent of AOL’s global work force of about 20,000, in the latest series of cuts to affect mostly its service centers.

The Journal said AOL Chief Executive Jonathan Miller presented the proposal to Time Warner executives last week.

Enderle said the discussions could be seen as a sign some of its previous strategies didn’t meet expectations.

Earlier this year, AOL partnered with several cable and phone companies to provide AOL-branded high-speed service, in most cases for $25.90 a month, as a way to encourage dial-up users to migrate to broadband. AOL has not released figures on how many took the offer.

The proposal under consideration would let Internet users who already have broadband elsewhere get AOL without switching providers.

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