AOL Shifts Strategy from Subscriptions to Ads

by Wendy Kaufman

August 3, 2006

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August 3, 2006

AOL will offer free e-mail -- and other services -- to broadband customers as it shifts its focus from subscriber revenue to advertising revenue. The changes are part of a strategy announced Wednesday that seeks to increase AOL's shrinking audience.

DON GONYEA, host:

In business news today, AOL's new strategy.

Once king of the Internet, AOL is reinventing itself. Beginning next month, it will offer free e-mail and other services to its broadband customers. At the same time, it will focus more on media content. The company hopes this will increase its audience and its online advertising business.

But as NPR's Wendy Kaufman reports, the company didn't have much choice.

WENDY KAUFMAN reporting:

The old AOL relied primarily on Internet subscriptions for revenue. But as Internet users switched from dial-up to broadband, many abandoned AOL for Yahoo, MSN, Google and others, which offered many of the same services for free. AOL's subscription base fell from nearly 27 million in 2002 to less than 18 million today.

Meanwhile, online advertising took off. It's now a $10 to $11 billion a year business, and its growing at about 20 to 30 percent a year. But until very recently, says advertising executive Jeff Lanctot, AOL was stuck in the past.

Mr. JEFF LANCTOT (Avenue A Razorfish): When you looked back at what many view now to be the ill-fated merger with Time Warner, it created a company that was so big that they had a difficult time responding to changes in the marketplace. AOL was a Model T in a Nascar world. They just had a very difficult time keeping up with their nimble competitors.

KAUFMAN: Lanctot's company, Avenue A Razorfish, is the largest buyer of online advertising in the country. And it's online advertising revenue that AOL is after.

Allen Weiner, research director with the Gartner Group, says that AOL's shifting focus from a subscription company to one centered on content and advertising is five years too late. Among other things, AOL has slipped to fifth place in the number of search queries.

Mr. ALLEN WEINER (Research Director, Gartner Group): Despite all of this, the prognosis is good.

KAUFMAN: He says AOL and its corporate parent, Time Warner, have significant resources.

Mr. WEINER: AOL wants to become the web portal for broadband media content. And with Warner Brothers content and Time content, they have a lot of weapons in their arsenal.

KAUFMAN: What's more, AOL and Google have a relationship. Weiner says the partnering of Google as a search provider and AOL as a media content provider has some very interesting possibilities.

Both Weiner and ad executive Lanctot suggest the key to AOL's success will be execution. And, they note, that AOL has increased its online ad revenue 40 percent in the past year.

Still, replacing about $800 million in subscription profits over the next three years won't be easy.

Wendy Kaufman, NPR News.

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