Well-Connected : America Online’s Deals Put It on Cloud Nine in Cyberspace
With a flurry of deal making that officials say could double its size within a year, America Online, long sneered at by the Internet cognoscenti, is firmly establishing itself as one of the dominant players in cyberspace.
Defying critics who expected customers to bypass AOL in favor of cheaper direct connections to the Internet, the company has instead become the dominant provider of Internet access--and is so confident of its prospects that it now views its competition not as other online companies, but as the major television networks.
On Monday, AOL added to its credentials as the everyman’s online service by inking a deal that will make AOL’s content available to customers of AT&T; Corp.’s new online service. The phone giant recently announced an aggressive plan to get into the Internet business by offering five hours a month of free access--and AOL, rather than being threatened, is now poised to ride AT&T;’s coattails.
AOL also confirmed Monday that it had reached an agreement with Netscape Communications to make Netscape’s popular Internet software available to AOL customers. The prospects impressed Wall Street, which after months of beating down AOL stock to below $50 a share, pushed its price up $4.375 to close at $48.375 on Nasdaq.
And AOL’s unrelenting marketing efforts continue to pay off, if not in profit then in subscriber growth. The service now has about 5 million subscribers, each of whom pay at least $9.95 a month to send e-mail, read electronic publications, browse through the Internet--and, perhaps most important, chat online with other AOL members.
For the now-cocky AOL executives, the sky’s the limit.
“We don’t see ourselves as only an online services company,” said Ted Leonsis, president of America Online Services. Cable companies, he said, provide a more apt comparison for America Online, whose audience would make it the nation’s third-largest cable company after Time Warner Inc. and Tele-Communications Inc.
It isn’t going to be easy, though. AOL must continue to manage its rapid growth--something it hasn’t always done well in the past--while also meeting the challenges of lower-cost Internet access companies and keeping publishers and other companies that provide information on its service happy.
AOL, like traditional rivals CompuServe and Prodigy, provides a variety of information and communications services on its own “closed” network, available only to its subscribers, as well as connections to the public Internet.
But as the World Wide Web and other technologies have made the Internet easier and more accessible, the advantages of a closed system have become less clear. Companies such as Netcom and Uunet Technologies have lured customers from commercial online services by offering faster and cheaper direct connections to the vast array of information and discussion groups available on the Internet.
Rivals have been running cost-comparison advertisements in the Los Angeles Times and other publications showing that 90 minutes of daily online usage at America Online can cost as much as $127.95, compared with $19.95 for 40 hours or more of Internet access on Netcom and several other independent Internet access providers.
“I must get 30 or 40 calls a month from AOL subscribers complaining about high bills; it’s amazing people pay this kind of money to go online,” said Al Bojorquez, a sales representative for Earthlink Network Inc., a Pasadena-based Internet access provider.
Meanwhile, America Online is feeling the squeeze from publishers, who are demanding a greater percentage of the revenues they generate for creating text, graphics, sound and video for online users to sample.
Time magazine, for example, recently left America Online for rival CompuServe, which officials said offered more money as well as a better platform to showcase the magazine’s service.
Senior Time executives were said to be particularly upset that America Online, instead of spotlighting well-known Internet content providers, emphasized popular but new and low-cost online services such as “NetGirl,” a relationship discussion forum geared toward women, and “Hecklers Online,” an interactive comedy forum.
“CompuServe is rewarding us handsomely to move” to their service, said Robert Pondiscio, Time’s public affairs director.
America Online replaced Time with Newsweek, which defected from Prodigy, the nation’s third-largest commercial online service. But America Online is also investing heavily in building new services through its “greenhouse” program.
The battle for content providers comes at a time when commercial online services are already having to spend millions of dollars to expand their telecommunications networks to accommodate new users--and many millions more to attract new subscribers, many of whom have joined for short periods and then quit.
To manage the rapid growth issue, America Online recently tapped former Federal Express Executive Vice President William J. Razzouk to be its president and chief executive. The selection of Razzouk has generally been applauded by analysts who say too rapid growth has been the undoing of some promising start-ups.
“The cognoscenti wonder why anybody would spend any time on America Online with all the free content on the World Wide Web,” said Peter Krasilovsky, senior analyst with Arlen Communication Inc., a media consulting firm in Bethesda, Md.
“But the truth is that when they’re on America Online, they don’t feel as lost in space as they feel on the Internet. We’ve found some really compelling evidence that people really do like America Online’s services.”
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Hyper Growth
In 11 years, America Online Inc. has gone from a tiny start-up in Vienna, Va., to the most popular online service in the country.
Worldwide Subscribers
In millions:
America Online: 5.0
CompuServe: 3.5
Prodigy: 2.0
Microsoft-Network: 0.85
*
AOL revenue has skyrocketed, although earnings have been less than spectacular in part because the company has continued to invest heavily in attracting new subscribers. In millions:
1995: $394.5 (Revenue)
1995: -$33.6* (Earnings (Loss))
* Loss due largely to acquisition-related expenses
Sources: Bloomberg Business News, Industry estimates, wire reports
Researched by JENNIFER OLDHAM / Los Angeles Times
