Online Economics - 2006 Annual Report

Another big economic story from 2005 is the quiet — at least initially — resurgence of AOL. As Randall Stross of the New York Times pointed out, AOL has long been the online world’s “dead man walking,” but has rebounded time and time again.57

Soon after AOL acquired Time Warner in January 2000, broadband service began to take over the lucrative dial-up system on which access to AOL was based. As a result, AOL saw its subscriber base dwindle from 26.5 million in 2002 to 21.2 million in January 2005.58

In December 2004, AOL announced it was becoming a largely free portal basing much of its revenue from advertising, much like Yahoo, Google and MSN, although it said it would charge for several features its research showed were most appealing to subscribers, including special features for children with access control for their parents, Spanish-language pages, protection against viruses and spam, and e-mail addresses at AOL.com.59 In the fall of 2005, AOL began an estimated $50 million campaign to promote the site as a free portal.60

The shift to a more advertising-dependent site has helped soften the blow of its losses in subscription revenue. In the second quarter of 2005, that revenue decreased 9%, or $168 million, but advertising revenue surged 45% over the year before to reach $99 million for the quarter. Combined with the increase in advertising revenue has been a reduction in expenses that has resulted in a 33% increase in operating income, from $276 million in the second quarter 2004 to $368 million in 2005.61

In addition to opening up many of its features to non-subscribers, AOL is also hoping to increase traffic through use of its free accessories, including Netscape and the AOL Instant Messenger chat system. Combined, those services are used by more than 50 million people a month who are not AOL members.62

AOL has also looked to video as way to increase its overall audience figures and appeal to more advertisers. Video coverage of the Live 8 concert drew 5 million viewers the day of the performance and tens of millions more who logged on later, according to Jim Bankoff, executive vice president of AOL.63

While some analysts speculate that AOL’s best days are behind it because it is already too far behind the other free, advertising-based portals, others say that AOL’s previous history with many former AOL subscribers and the belief that broadband is only in its early days could help AOL over the long run.64

Moreover, the AOL brand is still considered an “awfully powerful brand,” an important reputation not only for advertisers but for an audience that seeks reliable, trustworthy, and virus-free content.65