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AOL believes it can still count on users' loyalty. Plans are in the works to further segment AOL, so that "professional" subscribers would get more features for their money, while the budget-conscious would pay less. And AOL will soon introduce a variety of multi-user family packages. But so far, at least, subscriber "stickiness" may have less to do with satisfaction than with complacency. As Standard & Poor's analyst Scott Kessler puts it, "Nobody wants to change their e-mail address." The competition is working hard to get those AOL subscribers. Microsoft, which banished AOL from its Windows XP desktop last summer, is investing heavily in new features for its MSN service and generally getting good reviews.
To help turn things around, the AOL service has forged a few promising partnerships with hardware and software powerhouses, including Sony and Apple. Online retailer Amazon has contracted to provide AOL with its powerful shopping search technology, beginning this fall. But AOL hasn't yet made the most crucial kind of deal--with another cable provider. After investing billions to upgrade infrastructure, rival cable providers aren't ready to hand over their lucrative customer relationships. AOL will soon enjoy access to all of Time Warner Cable's 13 million homes, but that's less than 20% of the total market. Its high-speed service, now offered as an option on the Baby Bells DSL service and 20 of Time Warner Cable's markets, has garnered only around 500,000 paying customers, about 5% of the 10 million U.S. residential broadband users. Part of the problem is that AOL charges around $55 a month, compared with $30 to $50 for rival cable and telephone companies. Even on Time Warner's cable systems, the cheaper high-speed isp that the cable guys built before the merger, called Road Runner, has nearly 2 million customers and is reportedly still outselling AOL.
The AOL division's quest for rapid growth overseas, meanwhile, has been slow and costly. AOL Europe lost $600 million last year, even as AOL was forced by contractual obligation to buy out the 50% stake in that business owned by German media giant Bertelsmann. The price--$7 billion--had been set at the height of the Internet bubble and represents about twice what the Bertelsmann stake is worth today.
That sort of liability is just part of a debt burden that, combined with the current ad recession, hampers AOL Time Warner's ability to pay for new cable assets or another TV network. In fact, analysts are concerned that its balance sheet may put the company at a disadvantage when competitors like Microsoft are hoarding cash to fight tomorrow's new media battles.
Throughout AOL Time Warner, morale is slipping along with the stock price. People gossip about Pittman's stock sales--he sold 1.5 million shares last year for $70 million and now holds only about 13,000--and wonder how he will handle two full-time jobs. Company sources say there may be more executive moves as early as May, when Parsons formally succeeds Levin; while some speculate that if Pittman is successful he could be back at corporate full-time in a matter of months, others say that if he can't show progress at AOL by year-end, he may leave the company altogether.