Time Warner favours free AOL service

Time Warner is leaning towards a plan to shake up its AOL division by offering its services, including e-mail, free to users who have high-speed internet access.

The plan reflects Time Warner’s desire to accelerate AOL’s transformation from an internet dial-up service that charges a monthly subscription fee to a free portal, such as Google or Yahoo, that relies instead on advertising.

Time Warner on Thursday declined to comment on the plan, first reported by The Wall Street Journal. However, people familiar with the matter said a decision could come this month.

If the proposal was adopted, the company has predicted that more than one-third of its 18m subscribers could drop their $25.90 monthly subscriptions, costing it as much as $2bn in annual revenue. Part of that cost would be offset by job cuts in the group’s sales and marketing departments.

The plan recognises an ongoing defection of the dial-up subscribers who supply 80 per cent of AOL’s revenues to high-speed internet services offered by competitors. Since peaking at more than 26m in late 2002, AOL’s roster of dial-up clients has dropped to 18.6m.

At the same time, AOL has begun to experience a surge in online advertising. It grew 26 per cent in the most recent quarter to $392m, although AOL still trails rivals Google and Yahoo by a wide margin. Richard Parsons, Time Warner’s chief executive, has identified an AOL revival as a priority to boost the company’s languishing share price, which last year led to a takeover fight with a group of activist shareholders.

AOL entered into a partnership with Google last year. It has also raised the amount of free content in recent months to draw more traffic.

Laura Martin of Soleil Securities said Time Warner would be sacrificing what amounted to a $2bn annuity for advertising revenues that could be cyclical and less stable.