Is America Online's subscriber base about to peak?þþFor its owner, AOL Time Warner, most of the concern last week that drove its stock below $9 a share for a day revolved around the precipitous decline in the company's online advertising, and a government inquiry into the accounting for some of those ads.þþBut the company also said that America Online's subscriber count in the United States grew by only 477,000 in the second quarter, a 7 percent annual rate. A year ago, subscriptions grew by 12 percent; two years ago, the rate was 16 percent.þþOther figures show that America Online is working harder and offering more discounts to maintain its growth in dial-up, or narrowband, service. But at the same time, AOL is lagging the industry in its share of the newer broadband, or high-speed, service that is typically delivered over cable television systems or telephone lines.þþAmerica Online argues that the broadband market is still young, and, for that matter, less profitable than narrowband so far. But the online company would be the first to acknowledge that it was able to keep a 40 percent market share of dial-up service for years because it gained an early lead among customers who recommended the service to their friends and families.þþÿPeople put their friends online,ÿ said Marshall Cohen, senior vice president for research at AOL Time Warner. ÿBaby boomers put their parents online. Parents put their kids online. And people who are on America Online put their friends and family on AOL too.ÿþþAmerica Online now has only a 4 percent share of the 12 million broadband subscribers in the United States, and now experts are asking if it may be dragged down by the reverse phenomenon: if none of your friends use America Online for broadband, why would you?þþÿEven if they are wildly successful, AOL will never be able to replicate the dominance they have in dial-up in the broadband market,ÿ said Garry Betty, the chief executive of Earthlink.þþTo be sure, America Online's subscriber concerns are more about the future than the present. In the last year, AOL added three million domestic subscribers and two million more overseas. As a result, its total subscription revenue increased 20 percent from a year ago, to $1.79 billion for the second quarter.þþAmerica Online's great strength is a huge, stable roster of loyal customers, many of whom have been with it for years. Despite two price increases over the last several years, defections among this group, which may number 15 million, are low, perhaps below 2 percent a month, industry executives said.þþBut in recent years, the company has attracted a much more fickle set of newer customers and has increasingly used discounts to get them. Of the 26.5 million subscribers the company claims in the United States, about 3 million at any time are on free trials, typically for 45 days, and another 1.4 million are on 6- to 12-month free memberships given away with new computers. Some 4.3 million are on various plans with fees from $5 to $15 a month, with fewer online hours.þþThat is why its average revenue per member increased only 92 cents the last year, to $18.18, despite a $2-a-month price increase last summer in the main unlimited use monthly plan, to $23.90.þþÿIt's profitless prosperity,ÿ Mr. Betty said. By contrast, Earthlink, the No. 3 Internet service, shunned such deals and has allowed its dial-up subscriber base to shrink slightly the last year. But as a result its average revenue per user is $20.75, $2.57 more than AOL's, even though Earthlink's posted price is $21.95, $2 less than AOL's. ( Microsoft's MSN, which had revenue of about $1.5 billion for the fiscal year ended in June, has an average revenue per subscriber of only about $11, not enough to make the service profitable.)þþThe biggest problem for America Online is that there are half as many people coming online for the first time than there were two years ago.þþÿThe number of U.S. households with dial-up has peaked,ÿ said Jed Kolko, an analyst with Forrester Research. ÿU.S. consumers are switching from dial-up to broadband faster than new households are getting dial-up.ÿþþAmerica Online has always found these new users, or ÿnewbies,ÿ to be its best pool of prospective customers. MSN and Earthlink have largely thrived on disgruntled America Online customers who want more advanced features or what they hope will be better service.þþThis year 55 percent of United States households are connected to the Internet. That is up from 41 percent two years ago, according to Odyssey, a San Francisco research firm. Moreover, only 10 percent of households have a personal computer but no online service — the prime targets for a mailing of an America Online disk. Two years ago, 27 percent of households had computers but no online service.þþAmerica Online acknowledges that growth in the dial-up market is slowing, but says it has programs to appeal to new groups of customers now coming online, like lower-income and Hispanic families. AOL is a major advertiser on the Spanish language network Univision and offers customer service in Spanish.þþÿAs a group, the newbies are less techno-savvy than the previous wave of people who came online,ÿ Mr. Cohen of AOL said. ÿThe major aspects of our brand actually work better than they did two years ago — ease of use, safe and secure, people you can call if you need help.ÿþþThe bigger question is whether the advent of broadband disrupts the established order and convinces longtime America Online users to switch to other online providers in greater numbers than in the past.þþOn the face of it, the statistics seem dire for America Online. It has only 500,000 customers buying the high-speed version of its service. MSN and Earthlink have about 600,000 broadband subscribers, analysts say, more than AOL in absolute numbers and far more as a percentage of their total customers.þþBut far and away, the big winners in the broadband market have been the local cable companies and phone companies. The cable companies especially dominate because until recently, they exclusively offered their own brand of high-speed service. For example, AOL Time Warner's Road Runner service has about 2.5 million customers; AT&T Broadband has about 1.5 million.þþFor all its boasting about its powerful brand, America Online has proven impotent in head-to-head competition with the cable and phone companies. Even though Time Warner Cable has allowed access to several competing Internet services in the last nine months, Road Runner still accounts for about three quarters of the new subscriptions, with America Online's high-speed service and Earthlink splitting the rest of the market. One reason that America Online's high-speed service has been so ineffective, despite aggressive promotion to its members, is that it charges $55 a month, $10 more than Road Runner.þþSimilarly, Verizon's house brand of broadband service, Verizon Online, represents 70 percent to 80 percent of its total 1.4 million installed high-speed lines.þþÿWith dial-up service, you can use any modem and call from anywhere,ÿ said Keiko Harvey, the president of Verizon Advanced Services. ÿWith broadband, there is a little more complexity.ÿ As a result, she said, people are more inclined to buy it from the telephone company.þþIndeed, that's why MSN has aligned itself with Verizon and Qwest Communications, and why Yahoo, which is trying to get into the Internet access business, has a joint offering with SBC Communications.þþAmerica Online argues things are not as bad as they look for two reasons. First, the bulk of its customers are mainstream family users who have not been the first in line to buy broadband, especially at the $40 to $50 per month charged today. Second, many of the America Online members who do switch to broadband from other providers keep their America Online memberships in addition to their broadband service. AOL markets a $15-a-month bring-your-own-access plan, specifically designed for people with broadband connections who want to keep using the AOL software and e-mail.þþCompetitors and independent research confirm that America Online's arguments are true, so far. A survey by Forrester Research found that only 27 percent of the people who drop America Online service do so to move to a broadband service. That compares to 45 percent of defectors at Earthlink, which has a more technologically savvy clientele.þþBut at some point the mass market may move to broadband, particularly to some of the new, cheaper services being developed. And many wonder whether America Online customers will tire of paying extra for its e-mail service on top of another broadband service.þþÿMy question is how long can they milk their base,ÿ said Bob Visse, the marketing director for MSN. ÿThere is only so long people will pay $14.95 a month to keep their old e-mail address.ÿþ
Source: NY Times
