AOL: Raise it and they will follow

In the wake of an AOL dial-up price hike, smaller competitors such as Earthlink may see this as a good a time as any to follow suit. Where will it stop?

Why is America Online raising its access rates $1.95 a month? Because it can, not because it has to.

With the death of the free-Internet companies on the low end and the Baby Bells stranglehold on broadband access giving them free license to raise prices on the high end, the rate hike will be an easy way for AOL Time Warner to increase revenue, analysts say, and will encourage other access providers to increase their fees as well.

"It's a very good move for the company and [its] shareholders," said John Corcoran, Internet/Digital New Media analyst for CIBC World Markets. "It was simply too much money to leave on the table."

How much money? The increase--AOL's first price increase in three years, will add $57.5 million a month--$690 million a year--to AOL Time Warner's revenue. "It's a very interesting and bold move for them," said Safa Rashtchy, Internet analyst with US Bancorp Piper Jaffray. "AOL's focus has always been 'How do we monetize our user base more and more?'"

"It's like a different planet now," said Rashtchy. "That was a critical test for AOL - what would they do with the threat of free ISPs? They always kept their position." Both Rashtchy and Corcoran don't expect AOL to lose many customers because of the rate hike. AOL has never been cheap compared to its competitors. When other ISPs were charging $17.95 to $19.95 a month, AOL broke the $20 barrier and charged $21.95.

"The mass market is saying 'I like the walled garden, I like the features,'" said Corcoran.

James Goss, media and entertainment analyst with Barrington Research Associates, said the rate hike was largely surprising, and dismissed concerns that AOL was boosting subscription revenue to make its targeted revenue forecasts. "They laid out their objectives a year ago January and they reaffirmed them every step of the way," said Goss. "They've never wavered from them and they're still on track."

Corcoran added that not only was it a good move overall for the company, but the timing was perfect as well. The summer is usually the slowest time for subscriber growth, and the least usage on the networks, which makes it the time of year with the highest margins, Corcoran said. By the time the high subscriber growth period comes in the winter, consumers will be psychologically adjusted to the $23.90 monthly rate.

"They were very savvy in their timing," he said. Further, the rest of AOL's competitors like Earthlink and Microsoft's MSN are likely to raise their rates as well. "Most providers will probably raise their rates under the umbrella of the market leader," Corcoran said. "It's too attractive not to do."