Backing down in the face of stiff resistance from Wall Street and concern that the Internet would take over its hold on customers, America Online Inc. yesterday announced deep price cuts and dropped a controversial accounting practice that has helped make the company one of the year's biggest Wall Street losers.
The Dulles, Va.-based online service provider also moved to beef up its mix of news, chat and entertainment by naming the founder of the MTV cable television network, Robert Pittman, as head of its new AOL Networks division. He assumes many of the duties of Ted Leonsis, who becomes head of the new AOL Studios content-development division.
The changes mark a watershed for AOL, which saw skyrocketing growth in its customer base slow sharply over the summer. Unlike competitors who provide mostly electronic-mail service and the telecommunications connection to put customers in touch with the Internet, AOL's reorganization marks it even more firmly as a media company first and a technology company only as a means to that end.
"They're de-emphasizing the infrastructure and technology side of the game and emphasizing content and packaging," said Peter Barris, a general partner at New Enterprise Associates, a Baltimore venture capital firm. "I think that's the right decision, because that's where they add value."
AOL Chief Executive Stephen M. Case insisted, however, that the moves were not a retreat from AOL's former policies, which made AOL the first company in the online industry with $1 billion in annual sales but also contributed to the plunge of AOL shares from $71 in May to $22.375 in mid-October.
"I think it's anything but a retreat," Case said. "It's taking an aggressive position AOL is going to play offense again."
The announcements sparked a rally in AOL's shares. AOL closed up $1 to $25.625 yesterday in trading of nearly 4 million shares.
The pricing changes cut rates for most people and eliminated per-hour charges. The moves were designed to ease customers' "fear of the clock ticking" and take away a reason to drop AOL in favor of Internet-only access companies.
Most customers will now pay $19.95 a month for unlimited access both to the Internet and AOL's own content. There are other plans for consumers who want more limited service.
"They have a much better value to offer now," said Robert Seidman, editor at large of NetGuide magazine. "The average Internet service provider offering is $15 to $20 a month flat fee for access to the Internet."
The content moves, which include the Pittman appointment and alliances with "The Late Show with David Letterman" and Rolling Stone magazine, are part of the company's bid to boost its customer base of just under 7 million to "tens of millions," Case said.
"This is where the young, creative people are," Pittman said.
He compared AOL's opportunities to the chance cable networks had 15 years ago to cut into the TV networks' audience. "We've seen this movie before," he said. "The mass market is moving, in this case, to interactive services."
Pittman's job will be to boost AOL's audience enough to capture ever more advertising. The ad revenue is supposed to help AOL make up for lost money from abolishing the per-hour charges. But most online publishers have had trouble luring advertisers because their audiences are too small and unpredictable.
BTC AOL's challenge is to prove that advertising dollars can replace subscription fees as a primary revenue source, as they did in the cable television industry after initial resistance, Pittman said.
Another online entrepreneur said the key to proving that is generating sheer audience size.
"The advertising model is really important," said David Gardner, co-founder of the Motley Fool, an online investment newsletter distributed through both AOL and the World Wide Web. "You have to have foot traffic to get advertisers, and that's the path AOL is on."
Several experts said outside content providers like the Motley Fool could be the big losers in AOL's shake-up, as the price cuts diminish the amount that the company can pay creative talent. But Gardner said past AOL rate cuts have worked out for his firm because they attracted enough extra customers to let the Fool more than make up its losses.
AOL's stock dive since May has reflected concerns about slowing growth and concerns that accounting maneuvers disguised the fact that AOL still loses money if the marketing costs are charged to current earnings. Critics have feasted on AOL's practice of treating the money it spends mailing software to prospective customers as a capital expense, rather than a charge against current earnings.
AOL essentially conceded the point yesterday, saying it will call the direct-mail costs current expenses in the future. AOL said it will take a $385 million charge against its earnings to reflect the change in accounting, and another $75 million to pay for the company's reorganization.
Pub Date: 10/30/96