July 25, 2008, 1:04 PM — AOL will phase out several online services as the Time Warner unit continues to struggle in its transition from a business model based on subscription fees to one based on advertising revenue.
AOL will put out to pasture Xdrive, a hosted-storage service for individuals; AOL Pictures, a photo sharing and management site; and Bluestring, designed for sharing photos, music and videos, according to an internal memo obtained by technology news site TechCrunch.
In the memo, AOL Executive Vice President Kevin Conroy said these and mobile services AIM World and MyMobile will be "sunset" because they haven't gained enough popularity. A source close to AOL said the leaked memo is legit and that it was intended solely for Conroy's team.
AOL's popularity problem among end users and advertisers seems widespread, judging by the anemic growth AOL achieved in advertising revenues in the first quarter: 1 percent, when compared with the same quarter last year.
AOL has been on a years-long shift away from its traditional business, based on charging people for dial-up Internet access service and for exclusive online content. It has been trying to move to a model based on online advertising, which has been experiencing strong growth in the past five years.
However, while some of its services are undeniably popular, like its AIM instant messaging, AOL has failed to develop innovative services in growth areas, resorting to acquiring or creating many "me-too" services in markets where dominant players are already entrenched.
For example, AOL Pictures, its original photo upload and management service, couldn't compete against more technically advanced competitors like Flickr, which was founded in 2004 and acquired by Yahoo the following year. Meanwhile, Bluestring seems very similar to much more popular services like Photobucket, Slide and RockYou.
Unable to gain an edge through technical innovation, AOL has been investing heavily on acquiring advertising service providers like Advertising.com, Tacoda, Third Screen Media, Quigo, Lightningcast and AdTech, hoping to capture a piece of the action that way, but that strategy doesn't seem to be working too well either.
In its first-quarter earnings announcement, Time Warner stated that AOL's ad business had done well in sales to external sites and in paid search, but that it had been hurt by a decline in display ads.
AOL's ad revenue growth fell way below the U.S. rate. According to the Interactive Advertising Bureau (IAB), U.S. online ad revenue grew 18.2 percent in the first quarter.
This is the latest trimming of online services at AOL, which last year eliminated about 50 of them, as the company has become much more selective about maintaining only products that directly support the online advertising strategy, the source said.
AOL will try to sell Xdrive, AOL Pictures and Bluestring so that existing users of those services will be able to transition to a new provider, but if no buyer is found, the products will be shut down by the end of the year, according to the source.
If the services are closed, AOL plans to either burn end users' content into CDs and DVDs and send it to them or walk them through how to save the photos, videos and other media to local hard drives, the source said.
According to the memo, AOL also plans to merge its Video Portal with its AOL Programming Video Experiences by the beginning of the fourth quarter, as well as try to boost the online ad revenue generated by the AOL browser toolbar, desktop software, Webmail service and Truveo video search engine.