AOL Sees 'Transition' Year in 2003

Calling 2003 a "transition year," AOL said its bellwether Internet service probably will not see a noticeable upturn in business performance before 2004.

AOL said revenue will total between US$8.8 billion and $9 billion in 2003, flat compared with 2002 levels, with advertising income dropping 40 to 50 percent, largely because of "lower revenue recognition from prior-period commitments."

"It is clear that 2003 will be a transition year," AOL Time Warner chief financial officer Wayne Pace said. "Management has just concluded a comprehensive review of its operations and has developed an achievable business plan to build a strong foundation for the future."

Free to Fee

To help offset lost advertising revenue, AOL CEO Jon Miller said the company will heavily promote its bring-your-own-access plan for broadband users and its new exclusive content agreements with Time Warner's publishing and media properties.

Pay news services from CNN and music downloads from Warner and other record labels will be key parts of the content initiative. And AOL media and communications group chairman Dan Logan said there is more to come. "This is just the first step to putting even more AOL Time Warner content on the AOL service," he noted.

AOL also will borrow a page from fellow portal Yahoo! (Nasdaq: YHOO) by broadening its menu of fee-based services. For instance, the company announced a plan to offer online virus protection in connection with McAfee.com. Voice-activated services and online education are other premium services waiting in the wings.

Does Not Apply

Even though AOL is the largest Internet provider and therefore an important gauge of the online world's health, its 2003 results will reflect internal changes more than the external forces affecting all online companies.

"AOL is in a unique position in that it's dealing with a lot of internal issues," IDC vice president Richard Villars told the E-Commerce Times. "Scrape away some of that, and you still have a strong portal that can help direct millions of online users toward content and commerce. I think AOL's outlook is just that: AOL's."

The immediate reaction from Wall Street was not favorable, with AOL Time Warner shares falling 15 percent Tuesday. They were down another 5 percent to $13.54 in early trading Wednesday.

Questions Remain

Gartner (NYSE: IT) analyst Charles Abrams said the content move, though logical, is risky for the Time Warner side of the business, which will be limiting its own online audience by providing content exclusively to AOL users.

"One of the key benefits from making publications available online is to promote sales of subscriptions," Abrams said in a report. "If online readership is restricted to paid AOL members, these sales opportunities will be limited. Advertising and ancillary marketing revenue may also decline if readership is restricted."

Abrams said the AOL experiment will serve as an important lesson for other media conglomerates with both offline and online divisions. "Other companies with separate media properties and portals should watch the revenue and market share outcomes of the combined AOL Time Warner operation," he noted.