AOL Says Broadband Users Rapidly Joining New Service

Wall Street Journal, May 6, 2003

NEW YORK -- AOL Time Warner Inc.'s launch of the latest version of America Online has been well ahead of company forecasts and interest has been especially strong among high-speed Internet users, a company executive said Tuesday.

Lisa Hook, president of AOL's broadband division, said at a conference that AOL 8.0 Plus had been downloaded 40% more times than the company projected, and that nearly 80% of sessions with the service had been conducted over high-speed Internet lines. The download numbers don't account for installations of the service over CD.

Ms. Hook didn't disclose the company forecasts or actual download numbers, but the figures give the first picture of the new product's performance since its launch on March 31.

As growth in AOL's core dial-up service dries up, broadband is becoming central to the online unit's strategy. America Online faces internal pressure to show growth by the end of this year, or face the possibility of being spun off or sold. Dial-up subscribers fueled America Online's growth into the largest U.S. online service, but their numbers have dropped in the past two quarters, hit by price competition and defections to broadband services offered by phone and cable companies.

America Online's U.S. subscriber count dropped 289,000 to 26.2 million from the end of December to March 31, but broadband subscriptions rose 250,000 to 2.7 million.

Near the end of the first quarter, America Online launched a $35 million ad campaign with a retooled theme, emphasizing fun and exclusive offerings, rather than its historical ease-of-use message, in hopes of attracting broadband customers.

The latest version of the AOL service, which comes with enhanced e-mail filters and parental controls, is available both to customers who access the Web via the company's own dial-up access lines and those who do so through third-party broadband connections. It offers additional services, such as video and audio, to high-speed users.

AOL sells the broadband service for $9.95 to existing dial-up subscribers and $14.95 to others. It also is bundled with broadband access provided by various DSL and cable operators, including AOL unit Time Warner Cable.

For instance, a subscriber to Time Warner Cable can get high-speed access and AOL Broadband for $45 a month, or $55 if they also want dial-up AOL access. Of the 2.7 million AOL Broadband subscribers at the end of the first quarter, 2.05 million bought the product by itself, while 650,000 had purchased it through a bundled package.

Ms. Hook expressed some frustration with the state of broadband service. In response to an audience question, she said she would like to see network providers improve customer support and make installation simpler. "We're begging network providers every day to focus on the consumer experience," she said.

In an interview, she said that when consumers think of broadband, they think, "Broadband is highly fragmented, not reliable, massive outages, and there are 50 different modems out in the field." The challenge, she said, is to get consumers to look beyond access problems to the potential of broadband content.

Ms. Hook said her division is constantly developing new offerings to make its product more fun and attractive for customers. One example: a program to be launched next week, called Instant Greetings. It allows users of AOL's instant messaging program to send each other embedded animated greetings, such as a penguin that dances around the screen and wishes a friend a happy birthday. "The stuff people love is the stuff that allows them to personalize the service," Ms. Hook said.

Another example was a concert last Thursday by the Foo Fighters that was broadcast live exclusively to AOL Broadband subscribers. Video of the concert was streamed more than 350,000 times in 48 hours. Also, AOL and MLB Advanced Media recently reached a deal to offer broadband subscribers free access to some Major League Baseball online audio and video products, and discounts on others. The service offers other film, news, music and sports audio and video. Ms. Hook said the services now included in the product would cost customers over $140 on an a la carte basis.

Ms. Hook said that paid content is already starting to dominate the Internet. "There's not much of any quality that's free on the net," she said in her speech. In the interview, she added, "Soon we will have hundreds if not thousands of content providers out there with, if not a per-use fee, a subscription fee. The role of aggregator becomes more critical."

Although AOL was initially slow to adopt its broadband strategy, Ms. Hook said that AOL and Time Warner executives have united behind the effort. For example, she pointed to a much-improved relationship between America Online and AOL's TV units, Turner and Time Warner Cable. "It's been a much more successful model than in the past, when we showed up at the door and said, 'We're AOL, you owe us.' "

Before the AOL-Time Warner merger, Ms. Hook had been a longtime executive at Time Warner. She joined AOL in 2000 as head of the company's mobile-content unit.

While AOL has focused its broadband strategy on offering content, the audience could be attractive to advertisers. Based on studies of 25,000 broadband users, AOL concluded that 45% have income over $75,000, compared with 24% of dial-up users, Ms. Hook said, and that 59% have college degrees, compared with 39% of dial-up users.

In recent months, AOL rivals Microsoft Corp. and Yahoo Inc. have both introduced packages of premium content similar to AOL Broadband. Ms. Hook is nonplussed by the competition. "We have 35 million households," she said. "I'm not particularly troubled by other brands being in the market."