Honey, What's On Aol Tonight?

Selling America Online's new creations will be tricky

When Ted Leonsis talks about America Online Inc.'s planned cybershow Beggars & Choosers, he could just as easily be talking about his own life. The online soap tells the tale of a group of executives at a fictional television network through video clips and internal E-mail messages between the characters--a virtual Melrose Place meets Network. The choosers in the title are the network execs, who decide which TV shows live and which die. The beggars are the independent producers, who peddle their shows in hopes of landing a slot on the network lineup.

These days, Leonsis, who heads up AOL Studios, the content production arm of AOL, falls in the "beggar" category. His mission is to create jazzy online networks--focused on such themes as entertainment, games, or sports--that act much like super Web sites with programming, a la Beggars & Choosers, as well as info and news. Leonsis must then win spots for these networks not just on AOL--a virtual slam dunk--but on Internet services, popular search engines, and even AOL's archrival, Microsoft Network. His goal: to have the networks available to 20 million U.S. homes by the end of 1998. "There are only a few mega-brands among the cable networks," says Leonsis. "And that's the way it will be in this business."

But will AOL's content brand be among them? It's too early to call, but clearly Leonsis has carved out a knotty game plan. For one, few players have figured out what kind of online entertainment grabs consumers. And while AOL has had some hit content--notably finance site Motley Fool--most subscribers spend the bulk of their time doing things like chatting and sending E-mail. Cowen & Co. analyst Jamie Kiggen figures that AOL subscribers spend about 30% of their time in proprietary content areas. "If you are talking about real broad-based hits," says Peter Krasilovsky, vice-president at market-research firm Arlen Communications Inc., "we just haven't seen it yet from AOL."

But then, AOL isn't banking on big hits right away. Leonsis' mission is just one in a multipronged strategy that AOL CEO Stephen M. Case set in motion last fall when he split the company into three pieces: ANS Communications, the nuts-and-bolts access business, AOL Networks, the core online service, and AOL Studios, the content creation arm. The catalyst: the explosion of the Internet and the realization that if all three businesses were to flourish they would need to be free to exploit the Net--even if it might indirectly hurt the other businesses. Leonsis, for example, will try to make his content ubiquitous on the Web and elsewhere, though that could make it tougher for AOL Networks to be a standout. Says Case: "It was important to separate them and let them run with their own agendas."

AOL Networks, which controls the operation and programming of the online service, is still the big breadwinner. It delivers nearly all of the company's expected $1.7 billion in revenues for the fiscal year ending June 30. ANS, the access arm, gets 84% of its expected $198 million in revenues from providing network capacity to the AOL service; the rest comes from network services to outside corporations.

Leonsis' operation generates minuscule revenues, yet it's critical to AOL's long-term success. Nearly every online company is making it easier to navigate cyberspace. That's putting pressure on AOL's business of packaging the online world for easy consumption.

In the future, the real payoff could come from creating and owning unique content. "This is something AOL absolutely needs to do," says Jupiter Communications analyst Mark Mooradian. Leonsis' plan: bring in millions of dollars by selling ads and sponsorships on the new networks and charging syndication fees to Web-site operators keen to use the content. Cowen expects AOL Studios to generate revenues of about $115 million in fiscal year 1998.

The entertainment network will be one of the first ventures out of AOL Studios. Developed in partnership with former NBC whiz Brandon Tartikoff, the new network will launch simultaneously on the World Wide Web and AOL this fall. It will be made up of entertainment news, info, chat, and online comedies and dramas. Also in the works: networks for games, sports, and women's issues.

NOT SO FLUSH. Leonsis has ambitions beyond cyberspace, as well. Already, Tartikoff is developing a Showtime series based on Beggars & Choosers that will air in the fall and be integrated into the online version. "That's what will make this business sing," says Leonsis.

Deep pockets help, too. Take sports. AOL has some popular sports sites--such as Extreme Fans, which offers info and chat for sports fans--that could become part of a bigger network. But Leonsis would be up against the likes of ABC and its popular ESPN SportsZone, and the CBS-backed SportsLine. On the entertainment and game fronts, AOL Studios faces Microsoft Corp., which lavished some $100 million on original MSN programming last fall.

Leonsis is not so flush. While America Online finally broke out of the red last quarter, earning $2.6 million on $456 million in revenue, cash stood at just $197.8 million. Leonsis won't be able to depend exclusively on the parent company for funding. Analysts say he is trying to raise capital through a private placement or outside investor.

Leonsis does, however, have one big advantage: AOL's 8 million subscribers. Tartikoff says that's one of the main reasons he sought a deal with AOL. "If you want to reach the most people," says Tartikoff, "AOL's distribution system gives them to you." Now if Leonsis can just come up with some hits, he may find himself doing far less begging.

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