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AOL Shifts Focus to Broadband

New York— AOL Time Warner Inc.'s America Online unit last week unveiled a plan the Internet giant called a radical shift in strategy, but analysts characterized as too little, too late.

AOL, plagued by accounting problems and a shrinking subscriber base, pulled the curtain back on an initiative that calls for a new emphasis on broadband connectivity and exclusive content during a five-hour presentation last Tuesday.

The "radical" changes for the online unit included providing exclusive content from AOL Time Warner properties like Warner Music Group; Time Inc.; its Warner Bros. and New Line Cinema film studios; and cable channels like Cable News Network and Home Box Office.

In addition, AOL will work to develop exclusive Web content with these and other content providers. Its first venture along those lines would involve an HBO Comedy service, the company said.

The moves are an effort to step away from AOL's previous strategy of growing subscriber additions to one of fostering growth by adding value to the service. The AOL Broadband add-on has been available for $14.95 per month, and will stay at that price, but AOL had been using it as a retention tool.

Now, the service will be heavily marketed to AOL narrowband users to encourage them to migrate to broadband.

"We missed the first wave of broadband because we were too focused on connectivity and too timid about pushing our products," Miller said. "That ends now."

But not everyone in the analyst community was convinced.

Morgan Stanley Dean Witter cable analyst Richard Bilotti downgraded his rating on AOL the day after the presentation from "overweight" to "equal weight," stating that the new direction was too little, too late.

"The team said the right stuff, is focused on the right things and we believe that they'll execute on delivering the products/services," Bilotti wrote in his report. "But we just can't shake the feeling that this meeting/plan two years ago would have been a 'take the hill' plan, but now it just seems late, as so many of the competitive players on the field have made impressive advances."

Changing relationships?

What's less clear is how the new strategy will change AOL's relationship — or non-relationship — with cable operators, whose high-speed cable modem service has far outshone its telco competitors. In past years, AOL had been more successful in landing carriage deals with digital subscriber line services than with MSOs, who have balked at the high rates on which AOL had insisted for its broadband deals.

So far AOL has a broadband deal with Time Warner Cable — owned by AOL Time Warner — and recently reached an agreement with Comcast Corp. for its 22 million cable subscribers.

However, according to sources, the Comcast deal is weighted heavily in favor of the MSO. Comcast will receive about $38 of the $44.95 monthly charge for the service, as well as a large portion of electronic-commerce and advertising revenue.

Miller said AOL is working hard to reach deals with other cable operators, and some announcements could be forthcoming.

For example, past cable deals required that AOL perform all provisioning and billing for the AOL Broadband service. Now, the cable operator will perform those functions, Miller said.

But at least one MSO executive said the bring-your-own-access strategy seems to contradict forging other deals with operators.

"It does provide a bit of a conflict between the two marketing strategies," the executive said.

Granted, the Time Warner Cable and Comcast deals give AOL access to roughly 32 million cable subscribers. But not all of them subscribe to broadband, and there is no guarantee they ever will.

"To me, it clearly indicates that they are trying to reinvent the business," the MSO executive said. "They're trying to remake AOL the way they remade HBO. If you told people 10 or 15 years ago that people would buy HBO for anything other than movies, they would have said you were crazy."

Investors unimpressed

Investors also didn't seem impressed with the new strategy. AOL's stock fell mainly on the news that advertising revenue at the online unit is expected to fall by 40 percent to 50 percent next year. That's on top of a 38 percent decline expected for this year.

AOL stock was down $2.36 each to $14.21 per share in 4 p.m. trading on Dec. 3, a 14.2 percent decline. The stock dipped to $13.82 on Dec. 4, but regained some ground to $14 each on Dec. 5.

AOL reiterated its 2002 revenue guidance of between $8.8 billion and $9 billion. Advertising and commerce revenue should be between $1.5 billion and $1.6 billion. Cash flow at the online unit is expected to be $1.7 billion to $1.8 billion.

AOL Time Warner also affirmed overall company guidance for 2002, with cash flow growth expected to range between 5 percent and 9 percent, on revenue growth of 5 percent to 8 percent.