AOL Slumps as Peers Surge

May 8, 2006  •  Post A Comment

AOL’s attempt to turn around its business is failing to produce results, with the online service continuing to languish as its peers soar.

Despite the Time Warner unit’s efforts to stage a comeback by opening many of its features to nonmembers and rolling out a slew of new products, including the broadband video service In2TV-all in the hopes of driving online advertising sales-AOL’s first-quarter results suggest its challenges are more considerable than previously thought.

“While advertising growth was solid, we are skeptical that sustainable growth is possible in the face of continued page view declines,” said Merrill Lynch media analyst Jessica Reif Cohen in a research note.

AOL in the first quarter posted a 14 percent decline in operating income to $269 million, while revenue fell 7 percent to $2 billion. AOL blamed the weakness on subscriber losses at its dial-up business, which far outpaced the effect of a 26 percent rise in online advertising revenue to $392 million. The dial-up business, which accounts for more than three-quarters of AOL’s overall revenue, saw its revenue tumble 13 percent to $1.5 billion, driven by a loss of 3.1 million subscribers from a year ago.

While Wall Street had been expecting a decline in dial-up customers, the pace of AOL’s customer defection suggested that its success at converting dial-up subscribers to broadband was producing mixed results. To speed things up, AOL has struck alliances with a number of DSL providers, including Verizon Communications and AT&T, to help drive its broadband business. It has also raised the price of its unlimited dial-up service in the hopes of encouraging customers to switch to broadband.

Beyond that, the online provider is beefing up its product offering with a focus on services that take advantage of super-fast Internet connections. Its highest-profile service is In2TV, which offers free broadband access to 20,000 classic TV shows.

But success has not been immediate. Though some analysts credit AOL for taking steps to drive up its business, AOL’s main Web site, AOL.com, continues to lag behind fast-growing Web sites such as Yahoo and Microsoft’s MSN. And the number of non-AOL users visiting the site continues to be small. What’s more, AOL’s road to recovery could face some serious potholes should online advertising growth slow, noted Prudential Securities media analyst Katherine Styponias.

For their part, executives at Time Warner say it is too early in AOL’s recovery to grade its progress.

“It’s been part our plan that it’s going this way,” Time Warner Chief Operating Officer Jeffrey Bewkes told analysts last week. “It’s still early.”