UPDATE: AOL hopes to grow on broadband, premium services

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Facing analysts and press with "straight talk" on their faltering Internet business, AOL Time Warner Inc. (AOLTW) executives laid out a plan to stabilize and grow America Online Inc. (AOL) through a focus on broadband and premium services, while reining in costs, retooling advertising offerings and restoring the company's integrity.

"We don't pretend to have all the answers but I am confident we have arrived at a plan to put AOL on a path to growth," AOL Chief Executive Officer (CEO) Jon Miller told the audience during an "AOL Day" presentation in New York Tuesday.

Miller, who took the helm of the world's largest Internet service provider (ISP) last August, laid out his vision for revitalizing the struggling service as it faces slowed subscriber growth, declining ad revenue, mounting competition and government probes into the company's accounting.

At the core of the strategy is a continuation of the company's focus on improving AOL's narrowband service, while layering new premium services on top.

"Narrowband is not going away. It will continue to be a part of this market for many years," Miller said.

To shore up the dial-up service, the company plans on targeting user concerns such as connectivity issues, security and spam, while offering more differentiated and exclusive content.

On the security front, AOL announced a new deal with Network Associates Inc. to provide AOL users with free e-mail virus scanning using the security company's McAfee product. Under the agreement, a subscription security service is also being offered. Both new services will be available in the first half of 2003 with pricing revealed at that time.

Miller said that broadband growth is also central to the company's strategy, however, and AOL is concentrating on offering premium broadband offerings, particularly from other units of AOLTW's sprawling media empire. The company confirmed Tuesday that its Time Inc. division sealed a deal to provide AOL with exclusive online content from its magazines such as InStyle, Entertainment Weekly, People and Teen People.

The ISP has also forged an agreement with the CNN news division to integrate CNN video and text into its service, and is producing original content in conjunction with HBO.

CNN's pay video service, which is now available for US$4.95 a month on the Internet, will be accessible via AOL Broadband as a new member service.

Furthermore, AOL is collaborating with Warner Music Group to offer users digital music downloads, as well as the MusicNet service for streaming, downloads and CD burning. The Internet unit will also be working more closely with Warner Bros. Pictures and New Line Cinema to offer premiere video and tie-ins online.

"Our hope is to work along our entire array of our businesses, offering (a service) that is so compelling subscribers cannot live without it," said AOLTW CEO Richard Parsons.

As part of its new strategy, AOL is also turning the heat up under its bring-your-own-access Internet service, as well as pushing wireless offerings.

"This emerging multiband world creates challenges and staying in this game means rethinking (our strategy)," Miller said.

AOL plans to pitch its $14.95 a month stand-alone service through a series of new partnerships with cable and DSL (digital subscriber line) providers.

"We are moving away from connectivity and toward marketing," said AOL Broadband President Lisa Hook.

Marketing may be a new frontier for AOL, but advertising remains a thorn in the company's side. Earlier Tuesday, AOLTW announced that it expects steep declines in its AOL commerce and ad revenue for 2003.

"2003 is the year we bottom out," Miller said about the company's ad revenues, predicting a 15 percent to 25 percent year-over-year decline.

"Advertisers are demanding much more than just buttons and banners," Miller said.

To strengthen its ad business, the company said that it will improve its relationship with advertising partners, offering them more responsive services.

AOL is also hoping to reduce its reliance on ad revenues by launching a host of new premium services, including a forthcoming voicemail service.

"We are investing aggressively to develop new premium services," Miller said.

To do this, Miller said the company will be cutting costs and will halt any new country launches until "a viable economic model is in place." However, he did say that the company's European operations are gaining strength and "on the path to break even."

The ISP is also looking to retool its image, which has been both tarnished by government probes into its accounting practices, and shaken with unfulfilled promises to investors.

"AOL has suffered from the impression of being long on ambition and short on integrity. That ends now," Miller said.

As part of the company's image-bolstering campaign, AOLTW Chairman Steve Case is posting a letter for AOL members Tuesday, asking them to send in their complaints about the service.

"Our New Year's resolution is to fix every one of those problems," said Ted Leonsis, vice chairman and president of AOL's Advanced Products Group. "We are a humbled company," he added.

Despite the company's optimistic predictions, shares of AOLTW (AOL) dipped 12.25 percent to $14.54 in afternoon trading Tuesday.

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