AOL Unveils Web Strategy Amid Outlook of Sales Slump
AOL Time Warner laid down its long-term recovery plan Tuesday for its embattled Internet unit, but Wall Street appeared more worried about the company’s short-term financial slump.
Shares in AOL Time Warner fell more than 14% after the New York-based media giant announced advertising revenue at the America Online division would drop as much as 50% next year to levels last seen in 1998.
“It looks like 2003 is going to be the bite-the-bullet year for AOL,” said Gordon Hodge, analyst at Thomas Weisel Partners.
At an analyst conference in New York, AOL Time Warner Chief Executive Richard D. Parsons promised that the unit would stabilize next year and resume growth in 2004.
“This is not a wasting business,” Parsons said, predicting that America Online would once again become a growth engine for the parent company.
Wall Street’s reaction was disappointing to AOL executives, but hardly surprising. For years, AOL boasted its advertising revenue as a key reason for America Online’s success. Now that ad sales are slumping and government investigators are examining how AOL accounted for some deals, the company is trying to retrain investors to focus instead on other aspects, including new content deals and the potential to sell customers premium services.
Shares of AOL Time Warner closed Tuesday at $14.21, down $2.36 in New York Stock Exchange trading.
AOL warned that 2003 overall revenue for the online unit, including subscriptions and advertising, would be flat and earnings before interest, taxes, depreciation and amortization -- a key measure of the company’s performance -- would fall next year by 15% to 25%.
The company said the drop in ad revenue, which could fall from an estimated $1.5 billion-$1.6 billion this year to as low as $750 million in 2003, was due chiefly to the expiration of $500 million in long-term ad contracts signed in the dot-com heyday.
Tuesday’s meeting was the first opportunity for new America Online Chief Executive Jonathan Miller to lay out his three-pronged strategy for getting the Internet unit back on track and restoring investor confidence in the unit’s potential.
The plan focuses on beefing up the online service with features and exclusive content provided by AOL Time Warner’s entertainment properties. The company confirmed that it will pay several of its sister companies, including Time Inc. magazines, CNN and Warner Bros. movie studio for the exclusive right to distribute articles, photos and movie clips online.
AOL also said it is abandoning head-to-head competition against cable operators who offer high-speed access, an area where AOL has seriously lagged. America Online offers broadband service, but at a steeper cost than others.
As a result, the company said it will more aggressively market its $14.95 bring-your-own-access plan, which would allow members to retain e-mail accounts and access AOL content, even if they switch to another provider. AOL’s standard dial-up plan, including Internet access, costs $23.90 a month.
Miller predicted that cable companies would find the new strategy less threatening, while freeing AOL from having to deal with the costs, technical problems and customer-support issues involved in offering an expanded access plan itself.
It remains unclear whether AOL customers will find the AOL service valuable enough to pay $14.95 on top of a separate high-speed ISP bill, which can cost between $40 and $50.
Though Miller admitted AOL had “missed the first wave of broadband,” he said the new strategy instantly gives America Online a national footprint in the fast-growing market.
Previously, AOL’s broadband strategy was to buy high-speed access from cable operators at wholesale prices and then repackage it under the AOL brand. But cable operators were demanding stiff prices and unattractive terms. Now the company plans to partner with cable operators to offer AOL’s content along with cable ISPs.
Company officials said early results are promising. Currently about 2 million of AOL’s nearly 27-million U.S. subscribers buy the AOL service in addition to purchasing high-speed access from another provider. Another 650,000 buy the AOL-branded high-speed access plan.
Miller said the rollout of premium services is key to America Online’s growth.
By 2005, the company hopes 20% of its subscribers will buy one or more of the services, ranging from AOL Call Alerts, a voicemail service; to an anti-virus software protection to MusicNet, a song-downloading service expected to launch next month.
