AOL, Time Warner’s struggling internet subsidiary, estimates that it will add 1m subscribers to its US broadband service by the end of the year following an initiative to persuade dial-up customers to convert to high-speed internet.
Jonathan Miller, AOL’s chief executive, told FT Deutschland, the FT’s sister paper, that the conversion scheme was unlikely to boost 2006 revenues and might lead to lower profits. “This year, we are certainly creating some pressure on the bottom line by this move in the US to broadband. That’s a conscious decision. It is a classic short-term versus long-term trade-off.”
Mr Miller has been attempting to offset declining subscriber revenues with an increase in advertisements. Last summer AOL revamped its free web portal to offer a similar service to Yahoo or Microsoft’s MSN in an effort to boost viewers and attract more ads.
While AOL’s overall revenues declined 5 per cent to $8.3bn in 2005, it managed to increase its advertising revenues by 33 per cent, assisted by a buoyant online ad market. However, online traffic has remained flat, leading AOL this year to sign partnership deals with US telecoms operators and cable companies including Verizon and BellSouth to offer its narrowband subscribers a direct conversion to broadband.
But by increasing the price of its dial-up service to the same price as its broadband offering – about $26 per month – AOL runs the risk of angry subscribers simply quitting the service instead of converting.
Joe Redling, AOL’s chief marketing officer, said hopes for a conversion rate of 10 per cent of AOL’s narrowband subscriber base from its roughly 13m targeted dial-up users were “running pretty much on what we expected or a little above”.
AOL’s broadband service, with about 5m customers in the US, has failed to establish itself as a premium internet service while AOL’s dial-up service in the US has lost 7m subscribers over three years. By comparison, AT&T had 6.9m broadband customers at the end of 2005, while Comcast, the US cable group, was the biggest broadband supplier with 8.5m customers.
Mr Redling said revenue was expected to suffer as the division had factored in a stronger decline of dial-up customers because of the price increase, as well as having to split the subscription fees for broadband customers with its telecoms and cable partners.
According to industry estimates, less than 50 per cent of broadband fees will go to AOL compared with more than 80 per cent of dial-up fees.