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AOL's Low-End Play

By Catherine Yang America Online is taking the gloves off in the fight of its life. In addition to its $23.90-a-month premium service, early next year AOL (AOL) will launch a $9.95-a-month, Netscape-branded service to compete toe-to-toe with dialup discounters such as NetZero and Juno. Those low-cost competitors continue to steal its subscribers, so the once-proud ISP has decided it will brawl with competitors at low-ball prices. Shares of United Online (UNTD), which operates NetZero and Juno, were down 15% on Oct. 14 on AOL's announcement.

Can the Netscape maneuver save AOL? Not by itself. While it will likely help stanch customer defections, AOL can prevail only with a one-two punch aimed at winning subscribers, who are leaving not just for low-end dialup providers but also for high-end broadband competitors.

The online service is expected to end 2003 with 24.3 million subscribers, a loss of 2.2 million -- and the first annual decline in AOL history, according to Fulchrum Global Partners analyst Richard Greenfield. Small wonder it has to fight on all fronts. "It's better to keep [would-be defectors] part of the family than not," says Mark Zadell, Internet analyst at Blaylock & Partners.

BRAND RESONANCE. AOL certainly has a better chance of keeping bargain hunters by offering the Netscape alternative. Aimed at people who use the Internet primarily for Web searches and e-mail, this service will include a basic Internet connection, one e-mail account, search, and news -- all downloadable in two minutes, according to people familiar with the product.

AOL decided to launch the service after testing the concept on subscribers who called to cancel their accounts. Many showed interest in AOL's existing $9.95-a-month CompuServe service but thought the Netscape brand carried more resonance, according to those with knowledge of the new plan.

While AOL can make only a slim profit on dialup customers paying $9.95 a month, it will have a chance to woo them eventually to its new $14.95 AOL for Broadband product, a package of content and other services primed for high-speed connections that users purchase from a third party. And keeping more subscribers in the fold will help AOL revive its ailing advertising business.

There's a chance that the AOL-Netscape service may pleasantly surprise investors next year, stemming the 4 million dialup subscriber losses projected for next year by Fulchrum analyst Greenfield. For an online service struggling to come back, every bit counts. Yang covers AOL from BusinessWeek's Washington bureau

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