AOL boosting Internet service fee

Subscribers to pay $23.90 a month, starting in July

May 23, 2001|By BLOOMBERG NEWS

NEW YORK - AOL Time Warner Inc. will raise its monthly Internet service fee by $1.95, its first increase in three years, after many lower-cost rivals have gone out of business or increased their rates.

The increase, effective in July, will boost the fee paid by most of America Online's more than 29 million subscribers to $23.90, said spokeswoman Ann Brackbill. It may boost annual revenue by as much as $680 million.

America Online has added 17 million customers since its 1998 rate increase with new services such as an online calendar and offers such as giving subscribers the first opportunity to buy tickets to Madonna's tour. Some low-cost or free rivals, which relied on ads to make up for their lack of subscription fees, have shut down in the past year after advertising growth slowed.

AOL is "putting more content on the site to lock you in," said Mark Cavallone, an analyst at Friends Ivory & Sime, which owns AOL Time Warner shares. "You're used to their e-mail, and everyone has your e-mail address," which makes it harder to leave.

The company is confident that its growth will continue after the 8.9 percent price increase, Brackbill said. The rate increase doesn't affect CompuServe, another online service owned by AOL Time Warner.

The money from the rate increase will be used to upgrade software and develop additional services for America Online, Brackbill said.

The higher fee may add $600 million next year in cash flow, or earnings before interest, taxes, depreciation and amortization, Wit Sound- View media analyst Jordan Rohan said.

Rivals such as EarthLink Inc., the third-largest U.S. Internet service provider, and Microsoft Corp.'s MSN, the second-largest, may follow suit and raise their monthly prices, analysts said.

EarthLink, with 4.8 million customers, charges $19.95 for unlimited Internet access. Microsoft charges its 5 million online customers $21.95 a month. EarthLink is considering its options, spokeswoman Carla Shaw said.

Microsoft isn't planning to increase its fee, said Bob Visse, group product manager for MSN at Microsoft.

The higher AOL price could boost Microsoft's subscriber numbers if America Online customers switch to the cheaper service, Visse said.

AOL's last price increase, in 1998, cut the pace of customer growth by half, Merrill Lynch & Co. analysts Henry Blodget and Jessica Reif Cohen wrote in a research note. Churn, or the rate at which customers leave an Internet service, could increase in the second and third quarters, they said.

"Given the rich functionality AOL continues to add to its offering, and the increasing amount of time subscribers spend on the service, we'd expect more consistent price increases from AOL in future years," they wrote in the research note.

The rate increase relieved some investors' concerns about the company's ability to make its 2001 financial targets.

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