AOL Time Warner was briefly feared as a new media giant capable of commanding unprecedented power over emerging communications technology and distribution channels for news, music and movies. But the company quickly fell victim to a steep economic downturn and bitter corporate infighting. AOL Time Warner chairman Steve Case said this week he would resign to become an outside director in May, citing internal pressure. Chief executive Richard Parsons was appointed as his replacement, scheduled to assume a new dual chairman and chief executive position in May. The company is scheduled to report earnings on 29 January. Parsons' chief problems include managing some $26bn in debt and righting the America Online division, which was once touted as a chief growth engine but that has since become a drag on overall profits. Handed the challenge of fixing the matter, Jonathan Miller, a former USA Interactive executive, was appointed America Online's chief executive last year. Yahoo!'s transformation should give AOL hope. Not surprisingly, AOL's own ambitious turnaround plan, outlined in December, touches on many themes similar to those in Yahoo!'s plan from November 2001: warm up to advertising agencies, launch premium services and partner with broadband providers. However, the stakes in AOL's turnaround hinge on one important dilemma that its rival doesn't need to face: AOL's narrowband business, which has amassed 35 million subscribers, is in jeopardy. One of the strongest arguments supporting AOL's claim of resilience two years ago was its foundation of subscribers. The media and Internet industries quaked when AOL and Time Warner merged, fearing the combined company's prospects in broadband. The common belief was the company could convert AOL's narrowband subscriber base to joining the high-speed world of broadband, and then sell more interactive services to them. During a speech in December 2001, Robert Pittman, then AOL Time Warner's co-chief operating officer, predicted he could extract $159 a month per broadband household and up to $230 a month per household with services offered by Time Warner Cable. But the AOL service's future potential could not mask the harsher realities of running a broadband service. AOL Time Warner executives soon realised that migrating highly profitable AOL dial-up subscribers to broadband would drastically slice profit margins per subscriber. That's because buying broadband pipes remains expensive, proportional to buying narrowband lines. Facing this reality, AOL is backing away from its previous insistence on running its entire broadband service, from network maintenance to billing. Instead, the company plans to pursue partnerships with cable and telephone companies that would let it offer its flagship AOL service as a premium on top of an existing service. AOL also intends to heavily market "Bring Your Own Access," which charges people on other broadband services $14.95 a month to access AOL's proprietary environment. This double shift underscores a turnaround from AOL's lofty predictions two years ago. Internet companies are getting edged out of the business of selling broadband. "The access model is no longer, really, in the hands of the Internet portal," said May of Kaufman Bros. "In a broadband world, it's becoming the purview of the cable and (regional bell operating) companies." That threat, and Semel's example in selling premium services, has caused AOL to begin to follow in Yahoo!'s footsteps. In December, the company demonstrated its newest premium service, called AOL Call Alert, which allows members to manage incoming phone calls when online for $3.95 a month. AOL also plans to begin selling its digital music service MusicNet next month, a company representative said. When Yahoo! began selling premium services, the move was ridiculed by analysts and observers as a desperation move to diversify revenue. Many dismissed the idea of chiseling dollars from a user base accustomed to getting everything for free. But again, Semel's bet has so far proven to be the right one. Yahoo!'s 2.2 million subscribers have contributed to the overall $89.4m taken in by its fees and listings business -- which includes an undisclosed amount from premium services -- in the fourth quarter. Whether these bets will prove right in the coming few years could all hinge on whether online advertising rebounds. Until then, history is rewriting itself. "Semel should be given credit for focusing the organisation, for improving efficiency and pursuing interesting long-term growth prospects," said Jordan Rohan, an equity analyst at SoundView Technology Group.
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