A New Broadband 'Day' for AOL

At its highly anticipated analyst day, America Online plans to map out its turnaround with new broadband growth strategy but the company also warned that advertising and commerce revenues will plunge 40 to 50 percent in 2003.

by Erin Joyce Managing Editor of www.atnewyork.com [December 4, 2002]

America Online executives are unveiling a map of the beleaguered ISP's turnaround strategy in a presentation to Wall Street analysts Tuesday. Chief among the details is its broadband strategy.

AOL's Chief Executive Jon Miller is expected to headline how the company is approaching its main quandary: growing its broadband subscribers, despite the lower profit margins that come with the higher cost of providing the service.

That's in addition to the job of wringing incremental revenues out of the mostly dial-up subscriber base of 35 million, where growth is slowing, instead of spending big marketing dollars to acquire more narrowband users.

In advance of the meeting, the company said in a Tuesday morning press release that it expects solid growth in worldwide subscription revenue. But that growth will be offset by declines in advertising and commerce revenues of 40 to 50 percent in 2003, largely due to "lower revenue recognition from prior-period commitments."

The company said it expects America Online's full-year 2002 total revenues to range between $8.8 billion and $9.0 billion and advertising and commerce revenues to be between $1.5 billion and $1.6 billion. The company also said it expects America Online's EBITDA to total between $1.7 billion and $1.8 billion, trending toward the high end of that range.

On the broadband count, AOL executives are expected to provide more details on a plan to revamp AOL subscription fees for broadband subscribers who "bring their own access" from other providers. The new plan is reportedly around $15 a month.

With broadband prices from most providers ranging from $40 to close to $50 a month, the extra cost for "bring your own access" would keep AOL's monthly broadband price in the range of $55 and up. The price could create a potential tipping point where AOL risks losing broadband subscribers and narrowband conversions to less costly providers.

AOL's insistence on maintaining its brand by charging a premium for its network of content—on top of the already-hefty price of broadband service—has caused analysts to raise questions about how AOL can improve its broadband growth.

Given the realities and risks involved with enticing users to a pricier service, it is perhaps no surprise that AOL is reportedly mulling a plan to pull more content such as People magazine from the Time, Inc., side of the media company's empire and offer it exclusively to subscribers. AOL has already begun rolling out exclusive first-looks-and-listens from its music, film, and television divisions as a way to entice new broadband subscribers.

A persistent question before AOL is whether exclusive content offers are enough to help it improve gross margins on broadband customers, which some industry analysts peg at around 20 to 25 percent, way below the industry average even before factoring marketing and operating costs.

Since Miller took the reins of AOL last March in one of a series of management shake-ups at the ISP, he has moved quickly to address the company's commerce and advertising revenues, which have suffered the most in the two-year technology/advertising recession that began when the dot-com bubble burst. In the third quarter alone those revenues fell by 48 percent.

But his mandate to cut deals with broadband providers in order to give the ISP a stronger footing in the industry is a more complicated task because of the higher carriage fees involved with buying into broadband access deals.

Earlier this year, as its advertising and commerce revenues were unraveling in a post-bubble environment while questions about its accounting became louder, AOL was also looking like a broadband singleton at a party full of happy content and carriage couplings. While its U.S. competitors such as Microsoft's MSN, Earthlink, and United Online were racing to sign on partners and build out broadband offerings, AOL remained largely uninterested in finding deals of its own. Now, Yahoo! and SBC Communications have tied up on a broadband deal. Microsoft's Broadband MSN service has struck carriage deals with Verizon Communications and Qwest Communications, not to mention its own recent content deal with the Walt Disney Company.

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