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At every turn in the emergence of the Internet, America Online has been an object of scorn. Silicon Valley geeks sneered at its cheery user-friendliness and derisively dubbed it "America on training wheels." Internet gurus warned that free Internet service providers would clobber pricey AOL, which charges subscribers $21.95 a month.
Remember when rivals ran ads during the Super Bowl featuring the sound of a busy signal to call attention to AOL's overloaded access circuits? And a year ago, when the Dulles (Va.) company announced plans to merge with Old Media giant Time Warner Inc., Wall Street fretted that AOL would lose its go-go growth and nimble management style.
No one is sneering now. Once again, AOL has confounded its detractors and critics. The dot-com meltdown (see BusinessWeek Magazine, Mar. 26, 2001, "Rethinking the Internet") has revealed the danger lurking for Web companies such as Yahoo!, which relied on advertising to pay their way. With ad sales contracting, AOL's blend of advertising, subscription, and e-commerce revenues suddenly seems to be a savvy business model. "That mix looks like a blessing going into an ad slowdown," says David Card, senior analyst at Jupiter Media Metrix. Adds analyst Scott Reamer of S.G. Cowen: "That revenue diversification is exactly what other dot-coms wish they had."
CUTS BOTH WAYS. Instead of having to slash its fees to compete with free ISPs, AOL, which is increasing its market share, is widely expected soon to boost its $21.95 monthly charge for dial-up service by $1 or $2. It can afford to ask more, analysts believe, because so many free access providers have bitten the dust or launched their own pay services. Since the end of 2000, the flagship AOL service has added 2 million new subscribers, bringing total membership to 28 million worldwide. AOL's share price, at about $39.40, has fallen considerably in the last month, but is still up around 25% since the beginning of the year.
AOL Time Warner isn't immune to the advertising slump. But it's less vulnerable to a downturn than some rivals: Ad-related businesses generate only 25% of its total revenues. And as a major advertiser itself, AOL Time Warner can take advantage of cheaper rates. "Any slowdown in the ad economy that creates inventory cuts both ways for us," says Robert W. Pittman, chief operating officer of the media and Internet behemoth. And Merrill Lynch analyst Henry Blodget expects AOL Time Warner to grab an even larger piece of the shrinking online ad pie this year -- 45%, up from 38% in 2000.
Recent surveys show AOL pulling way ahead in usage, which gives it a critical edge whether it's selling ads or goods online. In February, one-third of all the time Americans spent online, at home or at work, was on AOL Time Warner properties. The comparable figures for Yahoo! and Microsoft were 7% and 6%, respectively. That loyalty is a prime reason AOL continues to attract advertisers and hasn't had to cut rates, says S.G. Cowen's Reamer (for a Q&A with AOL CEO Barry Schuler, see "Baking the Net into Their Lives").
AOL has seen its cybersales boom and is also selling lots of magazine subscriptions
"It's the difference between free and a subscription relationship," says Pittman. "People spend time with you, and if you don't abuse it, you can sell them stuff." Despite lackluster holiday sales nationwide last December, AOL e-commerce members rang up $20 billion in online sales -- an 83% jump over 1999 holiday e-commerce purchases.
AOL's growing status as a cybermall is in part due to the qualities that Silicon Valley techies deride: its stone-simple navigation and friendly community atmosphere. "AOL is an experience, not just a service provider," says Bruce Kasrel, senior analyst at Forrester Research. That gives it a platform to peddle more goods and services. Says Kasrel: "The more vested I am in the experience of AOL, the more I'll look to it for streaming video or whatever. The potential [for getting customers to add more sophisticated services] is very high."
TOUGH TARGET. One thing AOL has become adept at selling is subscriptions to Time Warner publications. The cross-pollination began humming months before the merger formally closed. AOL is pulling in new magazine subscriptions at a rate of 1 million a year. And AOL Time Warner is starting to ink deals with advertisers that extend existing promotions on AOL across the company's TV and print properties. In early March, it announced three such cross-platform marketing alliances: with Kinko's, Continental Airlines, and P&O Princess Cruises.
But AOL Time Warner executives shouldn't rest easy. Getting their culturally diverse units to work together to boost revenues enough to hit the company's target of 30% cash-flow growth this year will be a tough challenge -- even if ad sales don't crater. It's unclear whether advertisers will truly embrace cross-promotional deals, or just test the waters. Meanwhile, Microsoft is tapping its enormous financial and technical resources to turn up the pressure on AOL.
For now, the flagship online service is looking prescient. With its increasingly strong brand, AOL is well-positioned to leverage Time Warner's stellar portfolio of entertainment, news, and cable businesses. AOL Time Warner execs are crowing. After all the ridicule they've endured, who can blame them?
By Amy Borrus in Washington Edited by Thane Peterson
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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