AOL Is Relearning Its ABCs

With advertisers scarce, the focus is on retaining subscribers

Jonathan Miller, the new CEO of America Online Inc. (AOL ), is a man with one tough mission. But after two frenetic months on the job, the 45-year-old executive's battle plan is starting to take shape.

Miller brings with him a proven track record as a top lieutenant at Barry Diller's USA Interactive, where he helped build the media company's e-tailing unit. But that's small potatoes compared with what he has to pull off now at AOL: a thorough overhaul of the lumbering online service. Gone will be the heavy reliance on online advertising to fuel growth. Gone, too, will be the incessant drive to acquire new subscribers at any cost. Instead, Miller will be focusing on the 80% of AOL's revenues that it currently gets from its online subscriptions. "It's back to basics now," Miller told BusinessWeek in one of his first in-depth interviews since joining AOL.

Of course, it's not as if he has much choice, given the evaporation of all those online banner ads and the accounting questions being raised about some of AOL's earlier ad deals. Still, Miller thinks he can hold on to AOL's 35 million subscribers worldwide by introducing smart new content and services. That, he figures, will help AOL shave costs and even make a new nickel or two.

It's not going to be easy, though. Rival Internet service providers, including Earthlink and Microsoft Network, offer cheaper subscriptions. And Miller has made little progress attacking AOL's biggest challenge: finding a way to retain subscribers as more people switch from AOL's dial-up to broadband ISPs offered by telcos and cable companies.

So how will Miller's back-to-basics approach play out? For starters, potential customers may no longer get bombarded with AOL free-trial disks. Instead of spending lavishly to sign up an ever-dwindling number of new online users, Miller figures AOL can make more money by doing a better job of keeping the ones it already has and squeezing more out of them.

Even reducing a small fraction of the members AOL loses every month to other ISPs will yield huge gains in margins. While AOL won't disclose its monthly churn rate, market researcher IDC estimates that the large ISPs shed 3% to 4% of their subscribers each month, adding up to a loss of one-third to one-half of all the new subscribers they acquire in a year. With signup costs of $150 to $250 for each new user, departures hurt. "Reducing churn will go a long way towards profitability," according to IDC research manager Steven Harris.

Miller is counting on improved content--and marketing buzz. The company will launch its new version, AOL 8.0, on Oct. 15 with a splashy New York party featuring Alanis Morissette for 2,000 AOL members. Designed in part to lure users onto broadband, 8.0 will feature enhanced video and audio features, including CD-quality radio.

Both dial-up and broadband users will also be able to select from among six profiles--such as newshound or entertainment junkie, with content tailored to their interests. And AOL Interactive Services President James de Castro will borrow from his background in radio by creating fresh content for each group throughout the day. Says de Castro: "We want you to come back to us again and again."

AOL also hopes to goose revenues by selling premium services. Along with 8.0, AOL will introduce a $3.95-a-month Internet call-waiting service that will take messages from incoming phone calls while members are online. In addition, it may develop varied tiers of pricing for access by dial-up, broadband, and from mobile devices.

Still, the risk of more defections looms large as the race to enroll broadband users heats up. MSN and Yahoo! have just struck deals with DSL operators Verizon Communications and SBC Communications Inc., respectively, to be their preferred online services--at prices as much as 20% below AOL's. Rivals are also beefing up features. The new version of MSN "will get people to switch," says Yusef Mehdi, Microsoft's vice-president for MSN. That may spur AOL to redouble its efforts to sell broadband access through its powerful cable partners, Time Warner Cable and Comcast.

Will getting back to basics be enough? It's not exactly a bold new vision. But Miller's plan just may be the best thing the much-troubled AOL has had going for it for a long, long time.

By Catherine Yang in Dulles, Va.

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