AOL Paints Results as Turnaround Story

Time Warner's long-suffering Internet division, AOL, is showing signs that it can stem the tide of customer defections and may be positioned for a turnaround.

AOL, which has gone through several rounds of layoffs, improved its bottom-line results in the first quarter, posting income of US$277 million, up from $194 million in the year-ago period, though revenue was almost level year-over-year at $2.2 billion.

It still lost members -- more than 200,000 of them in the United States -- but the losses seem to have slowed as the division has pushed to load the online service with exclusive content and other features. By comparison, AOL lost 800,000 subscribers in a single quarter late last year.

AOL's overseas subscriber base also increased slightly in the quarter, and the company has targeted Europe and other markets as growth engines going forward. Time Warner also hopes the unit can capture an increasingly big piece of the interactive advertising pie that has driven Google and Yahoo to new heights.

"We've got confidence in it, and it's going in the right direction," Time Warner CEO Richard Parsons said in a conference call. "I think it's going to continue to surprise going forward."

Plans Afoot

Parsons noted that the Time Warner board heard from AOL executive Jon Miller last month about plans to make AOL more competitive in the overall Internet marketplace. Although Parsons would not disclose specifics, one idea reportedly floated to the board is to break down the barrier that has kept America Online separate from the rest of the Internet, allowing non-subscribers to access some of the service's features.

"All of us management and the board were impressed with the momentum that AOL is building," Parsons said.

Brand Power

Analysts were quick to back up the potential for turnaround, though they noted that AOL faces brutal competition and the prospect of continued membership losses as broadband continues to become more widely available and less expensive.

"For all the battering they've taken, they still have 24 million members in the U.S., and that's a powerful base to start from," IDC analyst Jonathan Gaw told the E-Commerce Times. "I think we're going to see AOL coming from a much different direction but heading toward the same future as Google and Yahoo and MSN."

That future will include more emphasis on communications tools -- and AOL has an advantage in the form of its widely used AOL Instant Messenger platform, which is particularly popular among younger users. The company also is focusing on how the AOL experience is better in broadband.

"AOL has had a lot of success appealing to the entry-level user," Gaw said. "But in order to turn things around, they have to convince users to stay with them when they upgrade to the fast stuff."

Price Points

If AOL can pull off a true turnaround, it would follow in the footsteps of Yahoo, which weathered the worst of the recession and now is positioned to capitalize on the boom in interactive advertising spending that has occurred in the past six to nine months.

Yankee Group senior analyst Rob Lancaster said although rumors have surfaced that AOL may establish its own search technology, AOL's ties to Google have been strengthened several times, with both companies seeing gains as a result.

"They seem to have a relationship that works for all parties," he told the E-Commerce Times.

AOL still is something of a drag on Time Warner as a whole, which recently posted improved results from many of its divisions, including its movies and music wings. AOL has lagged so severely that Time Warner, which officially dropped "AOL" from its name last year, has been said to be considering selling or spinning off the Internet unit.

AOL ended the quarter with 24 million subscribers in the United States, down more than 200,000, but the company's European division gained subscribers.