AOL services free in strategy shift

NEW YORK — AOL just gave its customers more reasons to stop paying.

In a strategy shift likely to accelerate the decline in its core Internet access business, AOL said Wednesday it would give away e-mail accounts and software previously available only to customers who paid as much as $26 a month.

AOL hopes to chase additional online advertising dollars instead. Encouraged by such trends as its 40 percent jump in ad revenue in the second quarter, AOL figures that by making services free, it can prevent users from defecting to Yahoo Inc., Google Inc. and Microsoft Corp., which have offered free, ad-supported e-mail for years.

Rob Enderle, an analyst with the Enderle Group, said the restructuring brings Time Warner Inc.'s online unit in line with "this decade as opposed to the last decade" and lets the company "hold on to the customers they had left."

"Had they done nothing, by the end of the decade, they would have been gone," Enderle said.

The move marks the end of an era for a company that grew rapidly in the 1990s by making it easy to connect online, giving millions of Americans their first taste of e-mail, the Web and instant messaging through discs that continually arrived unsolicited in mailboxes.

America Online, as it was then known, became the undisputed leader of dial-up Internet access when many people still used that method to get online. The greeting users got when signing on — "You've got mail!" — became so ensconced in pop culture that it was the title of a movie. AOL's shares flew so high in the Internet bubble that the company bought the Time Warner media giant in 2000.

But many promises of synergy from that deal evaporated. The company's stock plunged, key AOL executives left under pressure and now Time Warner management is firmly in charge.

"This is the final goodbye to the days when AOL was the king of the Internet," said Jeff Lanctot, general manager of aQuantive Inc.'s Avenue A/Razorfish, an agency that places some ads on AOL sites. "They now know they are the underdog."

The company expects to save more than $1 billion by the end of 2007 by cutting marketing, network and overhead costs. That's also roughly the amount AOL could lose a year if all 6.2 million U.S. broadband subscribers stop paying extra — generally $15 a month.

"Any guesses or speculation that this plan requires a 'hit' to AOL earnings is not right," said Jeff Bewkes, president and chief operating officer of Time Warner.