AOL is giving away nearly all services

Web pioneer to rely on ads, not access fees


NEW YORK -- Accelerating the demolition of the walled garden Time Warner placed around its subscribers and the open Web, AOL said yesterday that it would soon begin giving away nearly all of its services for free to anyone with a high-speed Internet connection.

Time Warner got a warm welcome from Wall Street yesterday for a stronger-than-expected second-quarter profit and its announcement of the major strategy change - the plan to drop all access fees for broadband users of its America Online unit.

The media giant's share price rose 2.5 percent to $16.67, leading a stock market rally as it reported net income of $1 billion.

AOL's move marks the end of an era for a company that grew rapidly in the 1990s by making it easy to connect online, giving millions of Americans their first taste of e-mail, the Web and instant messaging through discs that continually arrived unsolicited in mailboxes.

Web surfers who connect via cable or DSL (digital subscriber line) will no longer have to pay for an AOL e-mail address or security software, the company said.

"This will remove the biggest barrier for our members staying with AOL as they migrate to broadband," said Jeffrey L. Bewkes, Time Warner's president and chief operating officer. "We're going to stop sending our members to our competitors."

The announcement comes as AOL tries to make up for the flood of cancellations by subscribers. AOL reported 17.7 million U.S. subscribers in the second quarter, down sharply from its peak of 26.7 million in September 2002.

The Internet service will bet its future on winning more of the fast-growing market for online advertisements, which is expected to reach $16 billion this year.

The advertising-support approach puts AOL more squarely in competition with other Internet giants, including Yahoo, Google and Microsoft's MSN. Time Warner said its AOL ad revenue rose 40 percent in the second quarter, and said it expects to continue to outpace the broader online advertising market.

Time Warner executives surprised some analysts by denying that AOL's new strategy would result in lower income from the online unit this year.

Some early estimates of the impact of the lost access fees were for declines of $500 million or more this year.

In a conference call yesterday morning, Richard D. Parsons, Time Warner's chairman and chief executive, took naysayers to task for the pessimistic projections. He said the savings in marketing costs of acquiring new subscribers and the continuing rapid growth of online ad revenue would more than offset lost access fee revenue.

AOL plans to continue selling its dial-up Internet access service. But Time Warner executives said that, contrary to speculation by analysts and the press, AOL's profitability won't suffer as a result of the shift. That's because acquiring new dial-up customers has become such a money-losing proposition that the company plans to stop marketing the Web access service.

That means no more free AOL CDs in the mail, a longtime hallmark of the company's marketing efforts.

"Acquiring narrow-band subscribers is not profitable, so we made the decision to stop acquiring them," Bewkes said. "If we did nothing else and just that, this move alone would increase our earnings this year. ... Any guesses or speculation this plan requires a `hit' to AOL earnings is not right."

Time Warner credited its second quarter profit of $1 billion, or 20 cents per share adjusted for discontinued operations, to strong contributions from cable TV, plus the unexpectedly strong 40 percent gain in AOL's advertising revenue.

The second-quarter profit compared with a loss of $409 million, or 9 cents per share, in the quarter last year, when Time Warner incurred costs settling a shareholder lawsuit.

AOL said it intends to cut annual operating costs by $150 million to $200 million in 2006, and by $1 billion by the end of 2007. As a lure to get its once-paying members to try new services, AOL said it would offer back the old e-mail addresses to the millions who canceled their service in the past two years. AOL had saved them as an incentive.

At the beginning, America Online, as it was then known, became the undisputed leader of dial-up Internet access when many people still used that method to get online.

The greeting users got when signing on - "You've got mail!" - became so ensconced in pop culture that it became the title of a movie. And AOL's shares flew so high in the Internet bubble that the company bought Time Warner, a larger media giant, in 2000.

But many promises of synergy from that deal evaporated. The company's stock plunged, key AOL executives left under pressure and the company changed its name to remove "AOL" from it. Now Time Warner management is firmly in charge.

Time Warner expects to save more than $1 billion by the end of 2007 by cutting marketing, network and overhead costs. That's also roughly the amount that AOL could lose annually if all 6.2 million of its subscribers with broadband stop paying extra - generally $15 a month - for access to AOL's content.

Thomas S. Mulligan and Chris Gaither write for the Los Angeles Times. The Associated Press contributed to this article.

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