AOL Faces Up To Growing Broadband Threat

The report entitled Can AOL Bridge Its Broadband Gap claims that the troubled internet service provider will haemorrhage hundreds of millions in revenue even if it manages to upgrade its existing customers to broadband. It is estimated that there were almost 18 million residential broadband subscribers in the US at the end of last year (see Forecasts).

AOL has reacted to the arrival of new services by introducing a “Bring Your Own Access” scheme which lets customers who have signed up for broadband access from cable or telephone firms add a high-speed version of AOL for $14.95 a month. However as the report points out, AOL’s standard fee for dial-up is $23.90 per month and the company could lose up to a billion dollars in revenue by 2005. That is the year when broadband is predicted to overtake narrowband in terms of the number of household subscriptions.

“Broadband subscribers account for only about a quarter of the U.S. online audience today,” commented James Penhune, a director of the Strategy Analytics Global Broadband Practice. “But by 2005, we expect that half of all online homes will be using broadband connections, most of them provided by cable and telephone companies. AOL may be able to maintain a commanding share of the dial-up audience, but the overall size of this market will have declined significantly.”

US Internet Household Forecasts
	2002	2003	2004	2005	2006	2007	2008
Dial-Up	47.8	46.4	43.4	40.2	35.5	31.1	26.9
Broadband	17.9	25.3	33.3	41.6	49.5	56.9	64.1
Total	65.7	71.7	76.7	81.8	85.0	88.0	91.0
Source: Strategy Analytics, January 2003

Contingency plans It is hoped that revenues can be supplemented through the sale of premium services to dedicated subscribers. However, no clear plans have emerged and AOL Time Warner is currently preoccupied with the task of dealing with debts in the region of $26 billion (see AOL Sells Hughes Stake For $800 Million).

“Broadband may be the future, AOL first needs to fix its core dial-up business,” Penhune suggests. “Management should make the most of the serviceÂ’s huge base of subscribers by rebuilding ad revenues and establishing more premium services. They may also experiment with prices by adding less expensive options for new customers while boosting rates for the flagship service.”

The report comes at an unfortunate time for AOL Time Warner which recently reported the largest corporate loss in history (see AOL Time Warner Posts Record Loss, Turner To Quit). A number of senior executives including chairman Steve Case and vice-chairman Ted Turner have relinquished their posts in recent months.