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AOL: You've Got Content for Free

By Catherine Yang Time Warner (TWX) has decided that it's go-for-broke time at AOL, as the beleaguered online division launches a last-ditch gamble for survival. To generate growth even as its Internet service loses subscribers, the online company is launching one of the most radical strategic shifts in years -- throwing open its content for free in a bid to cash in on a gusher of online-ad revenues.

In this pull-out-the-stops strategy, AOL is betting the house on broadband content and on its programming acumen to differentiate itself from rivals. "There's no return to the walled garden whatsoever," says AOL CEO Jonathan F. Miller. "This gives the company a chance to play it big."

If the move pays off, it paves the way for AOL to catch up to the Broadband Age. AOL has foundered in recent years as subscribers fled in droves to cheaper and faster ISP service. In a departure from trying to add revenues through the flagship AOL subscription service, the company will now seek to bolster its audience across all its Web sites -- from to Mapquest and Moviefone -- aiming to capture its share of an explosion in high-margin online-ad dollars.

RAPPING AND BLOGGING. The refurbished is taking a different approach than the other big portals, such as Yahoo! (YHOO) and Microsoft's (MSFT) MSN, which hit their stride before broadband usage took off. AOL's site, to launch in July, will put streaming video and audio content front and center -- including exclusive live concerts, celebrity interviews, and film shorts.

Plus, AOL has plenty of experience, likely more than its rivals, in packaging and producing content. "AOL knows more about the art and science of programming than the other two competitors," says David Card, an online-content analyst at Jupiter Research.

The portal's Welcome Screen acts as a programming guide, highlighting the top TV and music clips of the moment, video search, and a "Live Web" box featuring the day's hottest blogs. Original AOL programming includes Unscripted, a video show where celebrities interview each other on their new movies. A recent demo featured Chris Rock and Adam Sandler on The Longest Yard. (One snippet: "Nelly is one of the best rappin' actors ever," says Rock. "He works out just like he was in jail.")

BIGGER AD PIE. Another site will premiere short films by unknown filmmakers. AOL is expected to soon announce other exclusive programs in partnership with parent Time Warner and other media companies, including a Hollywood gossip show.

Advertisers say they're eager for AOL to join the party, citing a huge demand for running TV-like media ads in a video- and audio-rich milieu. This year, ad inventory on major portals for such video-rich commercials has sold out, and marketers are looking for more. "The ad community has had an appetite for an alternative to Yahoo and MSN," says Jeff Lanctot, vice-president at interactive ad agency Avenue A.

Online-ad spending is expected to surge, from $10.7 billion this year to $16.1 billion in 2009, according to Jupiter Research -- and there's likely plenty to go around. "If they can compete for it, they'll get some percentage of the new dollars," says Jupiter online-ad analyst Gary Stein. Given these prospects, CEO Miller would like a better balance between ad revenues, which account for 20% of the total, and the 80% that come from subscription sales, which have been declining in recent years.

GOOGLE FACTOR. Regardless of the mix, AOL is under the gun to produce profits. And ads, which produce 50% margins vs. the 20% margins from subscriptions sale, offer hope. While U.S. online-ad revenues have grown by 38% over the last year, AOL's advertising revenue -- excluding results from its acquisition last year of ad network -- grew only 15%, estimates J.P. Morgan.

Moreover, AOL's page views are declining as dialup subscribers abandon ship. And it has lost out on traffic generated by Google (GOOG) searches. Because AOL's content is proprietary -- from original music to TV specials -- it doesn't show up in Google searches. But traffic rises once AOL content opens up to all. When the once-proprietary AOL Music channel launched as a stand-alone Web site last year, traffic increased by 57%, according to comScore Media Metrix.

Still, some already wonder whether this move isn't too little too late. Since it combined with Time Warner in 2001, AOL has struggled. "If we could have done it earlier, I would have been happier," admits CEO Miller. Given the post-merger turmoil at AOL that never really ended, however, the strategy comes better late than never.

WEB BLITZ After Miller arrived three years ago, he confronted an accounting scandal, since settled with the U.S. Securities & Exchange Commission and Justice Dept., that ravaged the old advertising sales force. Miller was unable to rebuild the unit until last year, when he hired Mike Kelly, a Time Warner veteran, the third chief of that business in two years. Since then, Kelly has jettisoned AOL's proprietary Rainman publishing software, which made AOL advertising buys unattractive to marketers, and has standardized AOL's ad inventory in preparation for the Web strategy.

The newly redesigned portal is part of a multisite Web approach. AOL wants to generate cross-traffic among all of its stand-alone Net properties, which attract about 110 million unique visitors a month. On June 6, it launched free Web e-mail -- integrated with its popular instant-messaging service -- at the site. In recent months, AOL has quietly debuted other new Web destinations, including shopping site In Store, travel site Pinpoint Travel, browser AOL Explorer, and AOL Music.

Still, despite this latest AOL initiative, Time Warner CEO Richard Parsons has mused aloud about the prospect of spinning off the online division. Even if AOL plays its best game of catch-up, Time Warner has to decide whether it's better off with or without the online unit that has caused so many headaches.

Either way, AOL knows all about being a comeback kid. It was an Internet survivor years before the tech bubble burst. Now it has to prove itself again. Yang is a correspondent in BusinessWeek's Washington bureau

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