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JULY 24, 2003
Groping for a Plan at America Online While AOL Time Warner's other units gain steam, cost-cutting at the ISP is still the order of the day until a real turnaround strategy emerges Perhaps the most nagging question Richard Parsons has faced since taking over as CEO at AOL Time Warner (AOL ) a year or so ago is what to do about the company's America Online Internet business. After ousting the key players who built America Online into a $9 billion company, could Parsons and a suiteful of non-Net Time Warner execs come up with a plan to keep the flagging Internet service provider service from turning into one of the biggest albatrosses in media industry history? The answer is turning out to be yes -- sort of. Judging from the conference call Parsons held with analysts after releasing the parent company's second-quarter results on July 23, hardly anyone has a clear concept of how to bring back the days when America Online grew rapidly and when holding its stock was nearly as good as winning the lottery. But even as Parsons & Co. work on that challenge, they're focusing on a time-tested if unimaginative fallback plan: Cut costs faster than revenues decline in order to hit their $1 billion free-cash-flow target this year for the online service. "We're managing for profitability," Don Logan, chairman of AOL Time Warner's media and communications group and the exec in charge of America Online, told analysts. The reason is obvious: Delivering on America Online's cash flow number is one key to perpetuating a recovery in the parent company's profits and stock price. BUYING TIME. That in itself is a considerable challenge for America Online. Parsons noted that 846,000 subscribers dropped the AOL dial-up, or "narrowband," service in the second quarter -- raising its loss of such subscribers to 1.3 million so far this year. AOL says it booted 45% of those for various reasons. But whatever the reason for their departure, America Online's first-half revenues fell 5%, to $4.3 billion, as a result. The unit has kept operating profits steady by reducing staff and lower network costs. And in theory, that should buy time for Logan to come up with a strategy for growth -- a realistic expectation in an industry where overall online ad spending is expected to rise 5% this year vs. a year ago, and where such America Online competitors as Yahoo! (YHOO ) are showing revenue gains. So far this year, America Online has signed up 550,000 new subscribers for its broadband -- or high-speed -- Net access. And it still has more than 25 million dial-up customers, about triple the number of Microsoft's (MSFT ) MSN, the No. 2 ISP. Even so, the America Online unit's stagnation can only be troubling. The problem appears to be that in all the turmoil that followed AOL's 2001 acquisition of Time Warner, the online unit lost the first-mover advantage that had helped it grow rapidly as it introduced novel features such as instant messaging. AOL came quite late to broadband, for instance -- well after millions of Net surfers had already switched to DSL (digital subscriber line) or cable Internet access, including some 3 million customers of Time Warner Cable's RoadRunner service. The Internet unit's uncharacteristically slow response to such opporunities could make it hard for it to produce the double-digit earnings growth in 2004 that Logan promised during the July 23 earnings presentation. HOLIDAY SYNERGY. Whether America Online delivers will depend on the success of several initiatives. It has tried to boost subscriptions by making the Web sites of Time Inc. magazines such as People, InStyle, and Entertainment Weekly available only to America Online customers. It also has begun offering video concerts of music artists such as Limp Bizkit. And Parsons is high on the coming release of AOL's latest client software, called AOL 9.0 Optimized and slated to debut in August or September. The company says, and analysts who have seen previews agree, that it's a sharp Web browser that takes advantage of broadband connections by slickly integrating audio and video. Plus, the early fall release will let PC makers bundle AOL 9.0 with their computers during the holiday season. Neither Parsons nor Logan would predict whether -- or when -- America Online can stem its loss of subscribers, citing "limited visibility." Parsons would go only so far as to joke to analysts: "We've got our fingers crossed."
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