AOL to Boost Price for Access; Stock Jumps
America Online Inc. said Monday that it will raise the monthly rate for unlimited access to its online service and the Internet by $2, news that triggered a gain in its stock price of more than 10%.
The Dulles, Va.-based company said rates for unlimited monthly service--the plan used by two-thirds of its 11 million customers--will rise by $2 to $21.95 in April. Other price plans will not be affected, it said.
“Consumers have been brainwashed that the Internet is free, that it is a God-given right, and it isn’t,” said Michael Parekh, an analyst with Goldman, Sachs & Co.
AOL shares traded at an all-time high of $112 before closing at $110.44, up $11.94, on news of the higher rates and its plans to split the company into three operating units. In the restructuring, Robert Pittman, a former MTV executive who envisions television and online services converging, was named president and will oversee day-to-day operations.
The company also said its CompuServe Interactive Services Inc. subsidiary, acquired last week, will eliminate about 500 jobs and speed development of its next generation of user software in a bid to cut operating losses.
CompuServe suspended work on a Web-based service called C, and AOL is reviewing alternatives for Sprynet, CompuServe’s Internet service provider. CompuServe, which has more than 2 million subscribers, will continue to operate as a wholly owned subsidiary.
AOL has not raised its $19.95 unlimited-access rate since the plan was introduced in December 1996. Prior to that, the average AOL subscriber spent seven hours a month online. That figure has risen to 23 hours a month, the company said.
Jill Frankle, a consumer Internet analyst with International Data Corp. in New York, said AOL’s competitors--especially consumer-oriented Internet service providers such as Earthlink Network and MindSpring Enterprises--will use the new rate “as a competitive factor to make them look more attractive to people who might be questioning staying with AOL.”
Even though AOL has had a series of well-publicized problems with network outages, junk e-mail and privacy violations, customers have been reluctant to leave the No. 1 service.
But Frankle said that may no longer be enough to prevent customers from defecting.
“More players out there recognize the need for educating new users, so it’s not much of a differentiating factor for AOL anymore--or one that commands a premium price point,” she said.
On Monday, Earthlink Network wasted no time trying to capitalize on the price hike. The Pasadena-based Internet service provider--which already has sales brochures encouraging AOL members to “graduate” to Earthlink--launched a “Get Out of AOL Free” campaign to lure away customers.
The special offer allows AOL members to switch to Earthlink’s $19.95-a-month service without paying the usual $25 setup fee. Those who switch can fill out an online change-of-address card, which Earthlink will send to their friends with the message “Free at last,” said Earthlink Chairman Sky Dayton.
“This is a great day in our history,” he said. “Millions of people on AOL are . . . looking for a reason to leave. . . . There’s no reason to be on AOL anymore.”
But employees at Enternet Communications, a Van Nuys-based Internet service provider, were less certain that AOL’s new price would drive customers into the arms of competitors.
“AOL customers seem to really be willing to go with the flow with them,” said Frank Bigham, Enternet’s operations manager. “They do stuff that no other ISP would imagine doing, like bombard you with advertising and sales pitches when you first log on.”
But he added: “We’re expecting that in about a month, when people see the new price on their bills and see that the service isn’t any different, that we will start getting calls.”
Paul Noglows, an analyst with the Hambrecht & Quist investment bank in San Francisco, said the headache involved in switching an e-mail address and the fact that AOL has content offerings that can’t be found on the Internet will encourage many customers to stay.
“AOL has become a regular part of people’s lives,” he said.
America Online, which will release second-quarter earnings today and meet with Wall Street analysts Wednesday, declined to say how much revenue the higher subscriber rates will add. But the money, which will be invested in building the online system, will not boost earnings, executives said.
