By Tom Lowry
The dream lives on at AOL's headquarters in Dulles, Va. Even at AOL Time Warner Inc.'s offices in New York, some cling to the hope that somehow, someday, the merger will pay off. And when it does, just you watch: Music, sports, and HBO will cascade through the Internet, mixing with e-commerce and instant chat.
Getting weary? AOL Time Warner has been talking about synergy and multimedia millions for three years now. But the payoff keeps getting pushed back, and the burden of AOL grows heavier by the day. Now, as Stephen M. Case prepares to step down as chairman of the combined company, directors should snap to their senses and dump the Internet unit. Sell it. Spin it off. Give it away, if need be. The magic is gone.
For a few crazy years, AOL ruled the Internet. People had PCs and modems, and when they put a small diskette in their computers, suddenly the wide world of cyberspace opened before them, albeit at a poky rate. It was almost magic, and AOL grew into a colossus, with 35 million subscribers. Now, those folks are moving to high-speed broadband connections. They're paying $35 to $50 a month to a phone or a cable outfit. Some 200,000 abandon AOL every month. AOL was their primary school--and now they're graduating.
AOL isn't letting those customers go without a fight. But its offer is laughable. Go ahead and pay your monthly bills to the cable or phone company. And if you pay AOL an extra $14.95 a month, you can keep your AOL account. Sound inviting? Maybe some hard-core AOL addicts will pay extra to keep their e-mail and a bit of exclusive content, but only a few. "As broadband becomes dominant," says Steven Rattner, co-founder of Quadrangle Group LLC, a media and communications investment firm, "it's not clear AOL can continue to prosper, or get the same kinds of margins."
That brings us to money. AOL'S cash flow has dropped from a peak of $2.3 billion in 2001 to what Merrill Lynch & Co. estimates will be $1.4 billion this year. Its debt totals $10 billion, which costs some $666 million a year to service. And holding on to its 27 million U.S. customers costs a mint. Marketing costs will rise by nearly 50%, from $1.5 billion this year to $2.2 billion by 2005, says Merrill Lynch.
Those are numbers Time Warner shareholders and CEO Richard D. Parsons should be happy to avoid. Ditching AOL, of course, means forfeiting a piece of Steve Case's dream--a world with great content, must-see Internet, and desktop HBO. But Time Warner and AOL have been struggling for months to come up with a package of exclusive content alluring enough to hold subscribers, and they're nowhere close. The challenges are huge. Outside the sleazy world of cyberporn, few have figured out how to create original Web content that people will pay for. What's worse, the biggest sensations on the Net are file-swapping sites such as Kazaa.com and Morpheus, the sons of Napster. Thanks to these sites, an entire generation of music and video lovers is getting used to free content. That may undermine AOL'S offerings for years to come.
It gets worse. While AOL struggled, Microsoft Corp.'s Web service, MSN, has been on the rise. With its latest version, experts say MSN has caught up to AOL in functionality and user-friendliness. Furthermore, MSN has zipped ahead in parental-control software and spam filters--a key concern for AOL's longtime family subscribers. What's more, Microsoft poured $500 million into R&D for its online service last year and is sitting on a $40 billion cash hoard. That's plenty of money to finance armies of engineers developing next generations of instant chat, spam control, and the multimedia dream. When Microsoft sinks its teeth into a market, it rarely settles for second place.
Give it up, AOL Time Warner. Rip those three letters from the front of your name. It means fewer headaches. Fewer red numbers. That lost icon from the '90s isn't going anywhere this century. Lowry covers AOL Time Warner from New York.