Last week we talked about
America Online AOL’s new plan to make money: free access for broadband users combined with an online ad push. The idea is to find future profits in advertising (like Google) instead of in the shrinking market for AOL subscriptions, which has always been the company’s bread and butter. Today, the Wall Street Journal offers more details about what the move could cost AOL (subscription required).
The paper expects that AOL will give up almost US$1 billion in profit over the next three years if it does do away with subscription fees for broadband users. Even to a company as large as AOL, this is some serious cash. The plan is to offset this loss by cutting the same amount from the company’s marketing budget (which won’t be as focused on signing up new subscribers) and by boosting ad sales.
In order to keep profits steady, AOL’s advertising division needs to grow by 30 percent a year. That sounds like a lot (and it is), but AOL has actually been doing an excellent job of selling advertising for the last few years, and ad sales have been growing at 35 percent a year. If they can’t keep up the growth, however, the company could be in trouble, since it will no longer have massive subscription revenue to fall back on in the lean years. Should that happen, Time Warner won’t be happy, as AOL supplies 20 percent of the company’s total profits.
The company’s risky plan is an acknowledgment that the old business model won’t work for much longer. AOL has been bleeding customers for years. Although they still have more than 18 million customers in the US alone, the company’s own estimates show that this number will fall to six million by 2010. As they contemplate a shift toward more advertising, their recent deal with Google looks better all the time.
The plan has met with controversy at AOL headquarters, in part because it would involve some substantial job cuts. If it’s pushed through, AOL would essentially transform itself into a portal company that could offer MapQuest directions, old shows on In2Tv, AOL branded e-mail, etc., etc. Such a move would make the company more of a direct rival to Yahoo, MSN, and even Google. With each of these companies competing for ad dollars, the online ad wars could heat up even further.