US Report: AOL 4.0 assimilates the Net

Conventional wisdom divides the online world into two camps: there's the Internet -- and then there's America Online.

For a long time, the distinction was valid: AOL (NYSE:AOL) was, and remains, a proprietary online service that happens to also offer access to the Internet. But observers say innovations in technology and in the AOL user interface, particularly in the new version of the AOL 4.0 software, set for release Monday, have blurred those lines.

"It's a testament to AOL that they've made people feel they're part of the AOL community, and with AOL, no matter where they go on the Internet," said Forrester Research analyst Chris Charron.

Even if AOL users only occasionally visited the Internet, they would make up a significant part of the online population. In fact, one in five Net users are AOL subscribers, according to analysts' estimates.

AOL targets the Net Web metering firm RelevantKnowledge Inc. puts the entire online population, ages 12 and up, at 53.4 million, and America Online now counts over 13 million subscribers. New AOL users accounted for a significant portion of Internet growth over the last few months, according to RelevantKnowledge.

And those users account for plenty of Internet traffic: one billion Web hits a day, according to AOL estimates. The average AOL user spends 20 percent of their time on the Internet.

"The Internet is really important to us," said David Gang, America Online senior vice president for strategic development. "We believe the Internet is key to the overall experience, and that's what members have told us. With AOL 4.0 the integration with the Internet will be closer than ever."

Part of the reason for all this activity outside of the AOL gated community is simply that AOL users aren't always aware they're going outside the walls.

Because of the way the company's proprietary software is organized, a button or keyword could take a user to an area of the AOL service, or to a Web page somewhere on the Net -- there's little distinction between the two, and the user doesn't have to launch any special software.

The Net is AOL

In a manner of speaking, AOL may be part of the Internet -- but the Internet is also part of AOL.

"They've done a good job of integrating the two," said analyst Charron. "And that's what they need to continue to do: to make the proprietary and Internet experience as synthesized as possible, as transparent as possible."

The Internet-AOL relationship is only going to grow more intimate. AOL 4.0, a complete upgrade set for a well-publicized release Monday, includes tighter integration of Internet content into the service, along with an upgraded Web browser.

Internet Explorer piggy backs AOL Since October 1996, AOL's software has incorporated a customized version of Microsoft Corp.'s (Nasdaq:MSFT) Internet Explorer browser as its Web-viewer, replacing software created by AOL.

The new AOL includes the guts of the 4.0 version of Explorer, the most recent major release of the software, which includes a host of bells and whistles unavailable in older versions.

Users can also operate other browsers, including Netscape Communications Corp.'s (Nasdaq:NSCP) Navigator, over the AOL Internet connection.

The most tangible effect of AOL's Internet integration has been its influence on the design of high-traffic Web sites such as Yahoo! (Nasdaq:YHOO), Excite (Nasdaq:XCIT) and Infoseek (Nasdaq:SEEK).

These sites, termed "portals," began as tools for searching for information on the Web, but in recent months have transformed themselves into multi-featured services, with features such as chat rooms, e-mail, personalized news and information, and even online card games.

The idea is to package the Internet into an America Online-like Web service, and has become widely imitated in such sites as Netscape's Netcenter and Snap.com.

AOL, based in Dulles, Va., announced income of $57.3 million, or 23 cents a share, for its fourth quarter ended June 30. That is up from $5.6 million, or 3 cents per share, for the same quarter last year. Revenues rose to $792.3 million, or 67 percent over last year's corresponding quarter.

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