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The situation is serious enough, however, that Case says he will rely more heavily on his founding fraternity to set the company right. AOL's cash cow is its 26 million U.S. subscribers, most of whom pay $23.90 a month for AOL's dial-up service. Almost half of that subscription revenue represents pure profit. But the U.S. dial-up market is already close to 60% saturation and isn't expected to hit 70% before 2005. AOL subscriber growth this year is estimated to drop to about 10%, just a third of its torrid pace in 1999.
The AOL division's long-term-growth gambit is to attract as many of its dial-up customers as possible into the promised land of broadband, where they would pay more--eventually as much as $200 a month, in Pittman's rosy scenario--for a variety of on-demand services, from wireless instant messaging to the ability to listen to Norah Jones or watch A Beautiful Mind anytime they like.
But delivering those services--and doing so at a profit--is proving a vastly more complex business proposition than anyone imagined. As the ongoing battle over music and video downloads suggests (think Napster), success in a broadband world requires solving complex questions about copyrights and digital encryption. Few executives, even at AOL Time Warner's movie and music divisions, are ready to open their treasure troves to the threat of piracy in an online, on-demand world. The broadband business also requires AOL to pay a cable or DSL provider for access to the pipes that reach customers' homes--at least in the 80% of the U.S. where Time Warner Cable doesn't control the cable systems--and to figure out a way to share additional revenues with a disparate array of partners. Such deals have become especially imperative since December, when AOL Time Warner lost out to Comcast in the bidding for AT&T's 14 million cable customers.
All this adds up to a grim reality: until AOL can offer easy access to premium content such as movies and music on demand, not enough customers will pay even the $55 a month it charges today for its broadband service. Those who do--the early adopters--are actually cutting into AOL profits. Every time one of its dial-up customers shifts to broadband, the AOL service goes from a nearly 40% profit margin to one potentially as low as 10%--mainly because it has to share broadband revenue with cable partners.
Can Pittman put AOL back on track? His appointment was lauded among employees who view him as an impassioned leader with a down-home style that reflects his Southern roots and a long stint in the music business. (After an early spell in radio, Pittman went on to found MTV and VH1 and did a stint at Time Warner before joining real estate firm Century 21.) He flies his own jet and has houses in New York, Colorado and Jamaica. But unlike many other AOL millionaires who spend more time with their toys than at the office, Pittman is committed to the company (although his wife Veronique and their two young children were not thrilled that he will be working two jobs, one of them in Virginia).
Both Parsons and Pittman have insisted that AOL's troubles are not as dramatic as the headlines suggest. Growth may have slowed, but it hasn't vanished. Pittman has told AOL division staff members to refocus on the service's core mission, "figuring out what's important to people and how to make it more convenient for them to do that online."