AOL subscribers view more pages, see more ads

AOL's end game is to reduce marketing and personnel costs by hundreds of millions of dollars a year, while growing lucrative advertising revenues.

In "AOL moves to pure advertising model, what about shareholder Google?" I discuss AOL's rumored plan to offer "almost everything" free to Internet users. According to The New York Times today:

Under the new plan, almost everything AOL offers — its content, software and e-mail addresses — will be available to any Web user free. There may be some exceptions — some advanced virus protection and parental control software, for example. And telephone customer service will probably be reserved for paying users.

As AOL seeks to "devote all (of its) energy into building its free Web-based services" the end-game is to reduce marketing and personnel costs by hundreds of millions of dollars a year, while growing lucrative advertising revenues.

AOL will need a lot of finesse to pull off such a "clean break" successfully. According to The New York Times:

This plan will require the board to accept lower profits at first until the advertising revenue grows further, the AOL executives said, although they declined to say how much profits would fall and at what rate. (The AOL executives spoke on the condition of anonymity because the plan is not scheduled for public announcement until Aug. 2.)

Jessica Reif Cohen, an analyst with Merrill Lynch, estimates that this plan could well cut its revenue from domestic subscriptions (both dial-up and high speed) by 52 percent, or $2.1 billion at an annual rate. And AOL's operating profit could fall by $251 million, 14 percent of her estimate for this year.

"Things are going to get worse before they get better," she said. It is unclear, she said, how long it will take to see improvements. Every conversation we have is: what is the inflection point? When do the subscriber losses get offset by the growth in advertising? Nobody knows this."

Of particular importance is preserving the heaving usage AOL subscribers are known for. The New York Times reports:

Last fall, the company started promoting the free, which featured most of the content it had offered its paying subscribers. AOL says 35 million nonsubscribers have used the free site. But it has not replaced the traffic lost from subscriber defections, because subscribers view many more pages than nonsubscribers. And each page, of course, is an opportunity to display advertising...

the new strategy will let AOL keep its most attractive customers — those who have stuck with it for years — even as they move to high-speed service. AOL hopes to work out deals with cable and phone companies to make it easy for AOL members to switch to high-speed service and keep their AOL e-mail addresses. They will also be able to use AOL's software client, which some have gotten used to as a way to navigate online, without an additional fee.

This is important, AOL executives say, because people who use the AOL software view many more of its pages, and thus its ads, than those who use a regular Web browser. AOL further hopes it will be able to lure back members who quit recently by offering them their old e-mail addresses.