Will customers pay more for premium content and communications services?
AOL sees its future in the high-speed world of broadband connections–like cable modems and DSL phone lines–where it can offer features like e-mail with embedded video clips to separate itself from the pack. Certainly, many people are moving to broadband. Almost 16 million of the nation’s nearly 70 million online customers use it, a 50 percent increase over last year. But about half of current dial-up customers say they won’t switch because of the price tag of $40 to $50 a month, according to a Jupiter Research survey. That’s a problem for AOL’s new strategy, which bets that many customers will pay $14.95 a month for the broadband version of AOL, on top of the high-speed connection. Ideally, AOL will generate even more revenue by offering services like downloading music singles for 99 cents each. But savvy computer users–especially teens–know how to get many such bells and whistles free of charge elsewhere (one big draw for kids–AOL Instant Messenger–is available free).
Can AOL Time Warner deliver “must have’’ media content?
Except for a smattering of financial sites, including The Wall Street Journal’s, consumers have shown they are reluctant to pay for news and information online. In a major survey earlier this year, Jupiter found that fewer than 10 percent of online users were willing to pay for online content or communications services in any of a number of categories. “There was no single category that really jumped out–from news to greeting cards, from porn to kids,” says David Card, a senior analyst at Jupiter. AOL, however, says that the content it will offer will include special material from such Time Warner publications as People, InStyle and Entertainment Weekly. The goal is to make the service so attractive that customers won’t drop it, and keep paying for the $14.95 package and more.
Will the new business model pay off?
Investors are skeptical. AOL Time Warner’s shares dropped last week partly because the company predicted that ad revenue would drop 40 to 50 percent further next year. Company executives say cost cuts (reportedly of at least $100 million), plus a modest increase in broadband customers who will buy AOL’s premium offerings, will return AOL to double-digit growth in 2004. Even AOL’s biggest long-term fan, analyst Mary Meeker of Morgan Stanley, is doubtful. She was once so bullish she helped persuade Time Warner’s board to merge with America Online three years ago. But Meeker downgraded the shares last week. She’s never encountered a company with “so much opportunity and such a powerful customer base and business model cede so much relative ground over a two-plus-year period and recover to sustainable growth,” she wrote in a report last week to clients. The company says its new mantra is to underpromise and overdeliver. At this point, investors would welcome a delivery of any kind.
