Originally created 10/14/02

Ailing AOL rediscovers its 35 million members



DULLES, Va. -- During the Internet love fest that crowned their company's heyday, America Online Inc.'s executives prided themselves on erecting multimillion dollar ad deals and mergers.

To make the deals happen, AOL played its members as an army of bargaining chips - not an audience to be served.

Can you blame the company's former chieftains, asks Jimmy de Castro, AOL's new president of interactive services, for taking their eyes off subscribers to pluck low-hanging bundles of cash?

De Castro describes it - figuratively - as an addiction.

"They started taking heroin when they got three-, four- and five-hundred million dollar deals thrown at them," said de Castro, a boisterous former radio executive who cuts a Don King-like figure in staid Dulles. "They sold out the service ... forsaking the member to deliver quarter-to-quarter (earnings)."

From one end of AOL's verdant, 220-acre campus to the other, top executives needed little prodding to admit that the world's largest Internet provider lost its way.

Now, with the company's corporate reputation and stock price in the gutter, AOL has embarked on a new mission: rekindling the affections of its 35 million subscribers. The company says next Tuesday's release of its new software, version 8.0, is the first step.

AOL executives say they're also clearing away the underbrush of hated pop-up ads and spam e-mails, bringing clean simplicity back to the service's pages.

Other than its massive subscriber base, there is little to cheer about at AOL, now beset by a federal investigation, an angry merger partner and the evaporation of advertising revenues.

Plastered around its headquarters - a Bauhaus-looking former arms warehouse - are fliers declaring "Members Rule!" Another poster blared "Do it for our members!", beseeching employees to test the new software.

The change in attitude owes itself to the company's short, mercurial history.

AOL reached its pinnacle in January 2000, when it announced one of the corporate coups of all time, the $106 billion merger with Time Warner's film, magazine and cable TV empire. At the time, the combined shares were worth $72.

Then AOL Time Warner took a spectacular nosedive. Shares of the world's largest media company now command around $12.

By any measure, the AOL division's new chief executive, Jon Miller, who replaced Bob Pittman in August, has a tough row to hoe. Analysts say Miller needs to extinguish legal and corporate brush fires while resuscitating the humbled entity's finances and the pride of its 18,000 workers.

Almost every facet of AOL is under review. The deal-spinning Business Affairs unit has been disbanded, its leader fired. New top managers have been hired or shifted from within.

Nothing is sacred, says de Castro, but the members.

Not even advertising.

"I am suggesting we should lose all the ads, all pop-ups," de Castro said, bustling around his Starbucks-chic office and alternately scribbling on a white board, clicking on a Web TV remote and jabbing his index finger at a pyramid chart.

"Did you see our service on 9/11? We put out the most beautiful fantastic service. No ads. It was awesome," he said.

Miller said it was unlikely AOL would dump ads and hike the $23.90 subscription fee, but similar drastic ideas are under review.

"We're having those debates and we're getting it out in the open and we're going to wrestle these strategies to the ground," said Miller, sitting back in a leather club chair. On his corner office wall hung a framed Hawaiian shirt, a gift from AOL Time Warner chairman Steve Case.

Miller, an e-commerce veteran whose success at USA Interactive landed him AOL's helm, has more immediate plans. The company is now cobbling an eBay-like "marketplace" platform that allows vendors to sell directly to AOL members.

And the release of 8.0, which Miller calls the company's most important to date, promises to be hugely hyped, with Warner Music's Alanis Morissette playing the kickoff next Tuesday at New York City's Avery Fisher Hall.

The new software boasts features like "Match Chat," which allow members to locate chat partners with similar interests. And broadband users are getting such offerings as CD-quality radio and live streaming performances of big-name music acts.

The release adds e-mail features, automatic redial on dropped connections and, for $3.95 a month, a service that tells members who is phoning when they're online.

Aiming to boost its four million broadband subscribers, AOL has just persuaded cable providers AT&T Broadband and Comcast to host its $54.95 high-speed subscription service. It is negotiating similar deals with others.

The company has already found success with its instant-messaging tool, which is now being grafted into cell phones and handheld computers.

Miller said AOL is even considering a cut-rate subscription for those who balk at the industry's highest monthly fee.

With its view from the gutter, it's tough to remember what went right at AOL. The company did, after all, almost single-handedly introduce Americans to the Internet, distilling the process to a few easy steps as it blanketed the nation with free CDs.

About four years ago, though, AOL's regard for its members began to change, said Jakob Nielsen, an Internet usability expert. Subscribers became cash cows to be milked. AOL's pages sprouted incessant ad pitches and pop-ups that herded subscribers toward big advertisers.

"They really betrayed their heritage," Nielsen said.

What's bad for customers was good for Wall Street, for a while. But when dot-coms stopped advertising, AOL's business model - and value - collapsed.

"It's really absurd," said David Joyce, media analyst for Miami investment bank Guzman & Co. "Investors have sold the stock down to where it's getting no valuation for AOL. They're only valuing the Time Warner businesses."

Joyce figures the stock will get "a nice pop" once the Securities and Exchange Commission and Department of Justice "clear up their issues" with AOL's accounting.

In a division generating more than $2 billion in revenues per quarter, Joyce pooh-poohs the investigation, saying it concerns just $300 million in earnings. AOL puts the figure at $49 million.

For Time Warner, an old-line media company with its own advertising revenue worries, nursing AOL back to health was the last thing it needed.

Word of the federal probe sparked hot talk of striking AOL's name from the corporate title, and unseating Case, AOL's longtime leader.

Some feel the anti-merger backlash has gone too far.

"Nineteen months ago, the financial markets thought it was a great deal. Now they think it's the bust of the century. The truth lies somewhere in between," said Chris Charron, a media analyst at Forrester Research.

Through all the whitewater, AOL's users always kept it afloat.

A June Forrester study depicted AOL users as astonishingly loyal, with 79 percent of 2000 members still subscribing in 2001 - a larger portion than any other provider, trouncing MSN's 43 percent.

AOL is finally understanding who butters its bread, in good times and bad.

"We want to energize this place by refocusing on what is really the core - serving the membership base," Miller said. "The rest will take care of itself."

Analysts suggest otherwise.

They say AOL needs to capitalize on unique offerings of Time Warner's movies, music and magazines. With its direct billing model, AOL could also jump into pay-per-view sales, adding tiny charges to a customer's bill for, say, listening to a music clip.

AOL might even try simplifying an ever more complex Internet, helping members, say, monitor Web auctions via cell phone.

Miller said he's exploring these ideas and others, including "special" sales deals he noticed were missing from AOL, even before he joined the company.

Much of AOL's future simply depends on an economic recovery that gives advertisers and consumers money to spend, Joyce said.

Some see a fork in the road ahead. Either AOL morphs into a cable-like subscription company, or conversely, a utility-like Internet access firm.

Miller is shooting for the first option. But the growth of public online chat and the ease of connecting via cheaper providers means AOL now has to compete with the entire Internet - not just other access companies.

"There's no law that says that if you were the premier provider you have to stay that way," Nielsen said. "We're going to need them less and less."