Will Fancy Sell at AOL?

It's going to add a slew of new premium offerings aimed at making up for lost subscribers. Question is, will that be enough?

By Catherine Yang

AOL, the flagging online division of Time Warner (TWX ), is about to rev up a potential growth business, aiming to boost earnings per subscriber. BusinessWeek has learned that AOL and Irish technology company Valista will announce on Nov. 15 that they're teaming up to enhance add-on premium services.

AOL introduced premium services two years ago as a way to increase profits over time, even as it loses dial-up subscribers. Today, 3.2 million of its 22.7 million members buy such services, ranging from $1.95-a-month extra password protection to $8.95-a-month online-music subscriptions.


  But the company hasn't expanded beyond a half-dozen offers, which are expected to contribute a negligible amount to the unit's projected $8.8 billion in 2004 revenues, according to Calyon Securities.

Now, with Valista's help, AOL can create new offerings faster. Starting late this year, expect a slew of new ones, including Web phone-calling, file-backup help, and eventually, more digital-entertainment downloads. "If I can multiply our premium services, it's a great win-win," says Ned Brody, AOL's senior vice-president for Premium Services.

Valista provides software that lets wireless carriers NTT DoCoMo (DCM ) and Vodaphone (VOD ) sell ring tones and other services to its subscribers. It also helps European Internet service providers, such as T-Online, Wanadoo, and Tiscali, sell premium services. By speeding the integration of third-party vendors' products onto AOL's back-end billing and customer-service systems, Valista's software can help AOL create new offerings faster than the 12 months it often took before.


  Underscoring the importance of premium services to its new vision, AOL broke the business out as one of four new divisions in a reorganization announced on Nov. 8. With the reorganization, AOL is focusing on expanding its reach to members and nonmembers alike by opening up its AOL.com Web site to the public. By appealing to Net users at large, AOL hopes to generate more ad dollars, ameliorating the problem of declining membership. It also envisions premium-service sales to nonsubscribers.

AOL membership has declined about 15%, from a peak of 26.7 million members two years ago. Revenues, too, are leveling off -- growing 1% in the third quarter, to $2.1 billion.

With its latest moves, AOL is aiming to show investors -- and its keepers at parent company Time Warner -- that it can shift strategy nimbly and find new sources of growth. Now, it's up to members -- and nonmembers -- to make that aim a reality.

Yang is a correspondent in BusinessWeek's Washington bureau

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