America Online Inc. agreed today to give refunds to customers for their inability to get online, offering cash or free online access to settle complaints that it sold people a product it couldn't reliably deliver.
AOL also will cease advertising its online service in February and add a disclaimer to ads thereafter that people may encounter delays logging on.
In addition, the company agreed to make it easier for people to cancel its service, including adding phone operators, more lines for customers to fax in their cancellations and detailed online instructions.
The settlement was reached with 36 state attorneys general. Because of the large number of states involved, the deal affects AOL's 8 million customers nationwide.
The agreement is in response to a rash of complaints against the nation's largest online service that it signed up hundreds of thousands of new users without the means to accommodate the heavy usage. The flood of new customers overwhelmed America Online's network because of a new pricing plan that for $19.95 a month gave them unlimited online time. At the same time, AOL undertook a massive advertising campaign to push its service.
Illinois Attorney General James Ryan told a press conference in Chicago that AOL also agreed to report to the states its progress on giving refunds, accepting cancellations and its latest advertising. And he said that AOL Chief Executive Steve Case, minutes before at the announcement, amended the agreement to say that instead of refunds AOL customers can get a free month of online service by requesting it in writing.
Refunds to AOL subscribers will be based on how many hours each customer recently has been able to get online. They will be given to any customers of the service between December 1996, when AOL began its unlimited access plan, and January 1997.
Customers who used the service for less than two hours during either or both the two months will get refunds of $39.90. Customers who used less than eight hours during the two months will get back 50 percent of that refund.
Customers who used more than eight hours but less than 15 will receive 25 percent refunds. Customers who used more than 15 hours will receive no refunds.
An America Online spokeswoman had no immediate comment.
The result of the heavy usage is often annoying busy signals for subscribers attempting to log on during peak periods. The company also has been plagued with a recent rash of technical glitches such as e-mail "brownouts" as it attempts to upgrade its network to accommodate the new users.
Several states had threatened to sue America Online unless it promises refunds and stops promoting a plan it can't reliably deliver.
America Online, based in Dulles, Va., has previously said it is selectively giving refunds to people who complain about their difficulty getting online. But until now, it had declined to give blanket refunds.
America Online stock shot up $1.75 to $37 on the New York Stock Exchange. Analysts viewed the settlement as a necessary move by America Online to get past a barrage of negative publicity at a time when its online service is threatened by people's easy access to the Internet.
"A long, drawn-out litigation would inevitably distract management at a time when AOL needs to critically focus on the right mix of gaining new customers and retaining existing customers in the threat of the wild frontier of the Internet," said Peter Kastner, an analyst at Boston-based Aberdeen Group.
America Online has said it is spending $350 million between now and June to upgrade its network, including buying new modems, building a new data center to house computer equipment and adding more customer support representatives.
The problems in getting online are expected to decrease as the new equipment is installed.