'You've got problems!'

As more users turn to the vast array of content beyond AOL's walls, the Net provider is fighting back in an urgent bid to remain relevant

By Hiawatha Bray, Globe Staff, 1/26/2004

After five years, Rich Krause finally gave up AOL. The 46-year-old attorney in Stillman Valley, Ill., got his Internet access from a small local dial-up provider, but also maintained a subscription to America Online, the nation's largest Internet service provider, with its vast array of news and entertainment resources. But Krause rarely used the AOL services.

"The features that they had on AOL I didn't find particularly useful or necessary," he said.

He had no use for chat rooms or instant messaging. And as for finding information online, he could run a search on Yahoo or Google to locate resources that were as good as AOL's.

So six months ago, Krause quit AOL. He wasn't alone. According to documents filed by AOL's parent company, Time Warner Inc., with the Securities and Exchange Commission, AOL lost 2 million US subscribers between September 2002 and September 2003. This Sunday AOL will launch a massive marketing blitz during the Super Bowl in an expensive attempt to reverse that trend, or at least hang on to the 24.7 million customers who remain. The company is spending $7.5 million to sponsor the halftime show, an extravaganza featuring Janet Jackson, P. Diddy, and Kid Rock. And during the game, we'll see the father-and-son cast of the cable TV show "American Chopper" promoting a new AOL feature that will speed up Web surfing, even for customers who use slow telephone modem connections. It's a colorful and costly effort to convince Internet users that one of the old titans of the Internet hasn't sunk into irrelevance.

AOL made its bones by protecting ordinary consumers from the intimidating complexity of the Internet. In the process, the service introduced millions of new computer users to the online world.

"AOL was very smart about being the simple solution," said Len Short, the company's executive vice president of brand marketing. Even in AOL's heyday, during the late 1990s, many customers would drift away, but there were lots of newcomers to replace them. But today, there are hardly any newbies left; 70 percent of Americans are online.

These experienced users know there's a vast amount of data beyond the walls of AOL, much of it free and easily located by anyone with bare-bones Internet service and a Web browser. Cut-rate Internet provider United Online Inc. has taken advantage of this, offering basic Internet dial-up service for $9.95 a month, compared to AOL's $23.90 dial-up price. United Online picked up 173,000 new customers between July and September 2003, to reach 2.7 million subscribers.

Then there's broadband. About one US household in five now pays up to $50 a month for high-speed Internet service delivered via DSL phone lines or cable TV modem connections. These consumers can also get AOL's rich assortment of services for an additional $14.95 a month. But similar free fare can be found in seconds by searching Google.

"AOL does a lot of stuff really well," said Joseph Laszlo, senior analyst for Jupiter Research in New York, "but is that combination of stuff really worth an additional $15 a month?"

AOL's archrival, Microsoft Corp., has moved quickly to shore up its presence among high-end broadband users. The company charges just $9.95 a month for its broadband offering, MSN Premium. Many subscribers don't even pay that.

People who get DSL broadband access from Verizon Communications or Qwest Communications International Inc. can receive MSN Premium at no additional charge. Microsoft gets a cut of the customers' broadband subscription fees, as well as a chance to bombard them with advertisements and sell them upgrades like an Internet music service for $29.95 a year.

But AOL has no such arrangements with broadband carriers. Company officials say they're relying solely on the service's rich content to justify the $14.95 price tag.

In short, AOL's caught in a vise. Cheaper Internet providers are seizing its budget-minded customers. Meanwhile, the broadband services, with help from Microsoft, are grabbing the more affluent subscribers.

"The middle's getting squeezed," said Jonathan Gaw, research manager for online consumer behavior at tech research firm IDC Corp. "The bulk of their business is in decline."

AOL is fighting back at the low end of the market. The company has just launched Netscape, a new discount dial-up service that takes dead aim at United Online with its $9.95 monthly rate. Now comes a campaign to retain its mainstream dial-up users, and attract a larger share of broadband clients.

Central to the strategy is AOL 9, the latest version of the company's software. Designed for use either by dial-up or broadband customers, the software boasts improved e-mail management and spam filtering, better parental control features, and upgraded multimedia services, like the ability to play files encoded in Apple Computer Inc.'s popular QuickTime format. Also built into the system is a new technology called TopSpeed, which uses special compression and caching software to deliver Net files faster, whether the customer is using broadband or dial-up. The concept has been a hit for United Online, which offers a high-speed version of its dial-up service based on the same technology.

Until now, AOL hasn't made much of TopSpeed, even though AOL 9 has been available for over six months. That has changed in the run-up to the Super Bowl. The company will run ads during the game featuring motorcycle mechanic Paul Teutel Sr. and his son, Paul Jr., whose reality TV show "American Chopper" runs on cable's Discovery Channel. AOL's Short said the company chose relatively unknown performers so viewers would focus on the software's ability to speed up their Internet sessions.

In addition, AOL will sponsor the Super Bowl halftime show -- rebranded as the AOL TopSpeed Halftime Show -- to further stress the company's high-performance software. If that weren't enough, viewers will be directed to the free AOL.com website for exclusive video and music content from the halftime show.

"No hard sell, no `go sign up now,' " vowed Short; just lots of pop entertainment -- and a video demonstrating the benefits of AOL TopSpeed technology. "We do it big," said Short, "and we do it in a very compelling way."

But it will take more than one big media barrage to reverse AOL's slide. The company needs to generate more revenue from advertisements run on the service. Overall Internet ad sales have indeed picked up over the past year, but most of the new money is going to targeted ads displayed on search services like Google and Yahoo. That means that AOL's current dependence on subscriptions -- which produce about 90 percent of revenue -- won't diminish much for now.

So AOL's future will depend on its ability to convince consumers that it's still relevant. Author and Internet marketing expert Seth Godin says the company's best bet is to emulate another member of the Time Warner stable -- cable TV channel HBO. Godin said if AOL can create the Internet equivalent of "The Sopranos" or "Sex in the City," millions of consumers will gladly pay extra for the chance to tune in. Unfortunately, he added, "we don't know what the next great content thing would be."

Until AOL finds out, the company is in peril.

"AOL is now in this fascinating moment where they have all these people that are about to leave," said Godin. If AOL can't invent a new standard, Godin added, "they will leave."

Hiawatha Bray can be reached at bray@globe.com.
© Copyright 2004 Globe Newspaper Company.

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