DULLES, Va. -- The walls surrounding America Online Inc.'s well-manicured gardens are crumbling: AOL is abandoning its strategy of exclusivity and will free much of its music, sports, and other programming to nonsubscribers, in hopes of boosting ad sales.
The decision could help the company counter declining subscriptions as Internet users move to high-speed connections. The danger is that the bold new strategy will instead accelerate the erosion of AOL's core revenue source.
"AOL is left looking like the race car in a race that nobody wants to run in anymore," said Rob Enderle, an analyst in San Jose, Calif. "AOL's dead as it exists. It has to find a way to become relevant again."
Though AOL executives insist the company's short-term prospects are healthy, they agree they ultimately must rely less on their legacy subscription business. With the recent renaissance in online advertising, AOL wants a bigger share of those dollars -- and to do that, it must open its members-only "walled gardens" to the public. Not that it's abandoning the subscriptions: It's all about balance.
"Having two revenue streams inoculates you from the vagaries of the industry," said Ted Leonsis, vice chairman in charge of AOL's new ad-driven audiences division. "We could have an advertising recession, and that would be really bad if you were just an advertising-driven company."
Leonsis insists the change is less fundamental than it seems, given that AOL already has thriving "untethered" properties it acquired, including Moviefone and MapQuest. Leonsis estimates AOL will need to grow its monthly audience of unique visitors, to all the sites it owns, by only 25 percent within five years.
AOL, launched in 1989, has thrived on selling Internet access plus exclusive programming in one easy-to-use software package that fits on a disc. It's how millions first got onto the Internet. But as Internet users matured, they often dumped AOL along with their dial-up connections. AOL responded by setting up a broadband division.
The company now has nearly 5 million broadband subscribers, up from about 3 million a year ago. But overall the number of US subscribers dropped to 23 million in September, down from a peak of 27 million two years earlier.
For many, exclusive programming alone wasn't worth the $14.95 monthly fee on top of DSL or cable service.
Nonetheless, AOL remains committed to broadband and says it considers the free access to programming a natural outgrowth.
"We've built that new business, and now we have an opportunity to focus on creating a different, a new balance, a better balance" between subscription and advertising, said Kevin Conroy, AOL's executive vice president for Web brands.
True, AOL has a late start compared with Yahoo and Microsoft's MSN, but executives say the shift couldn't have occurred any sooner.
For one thing, AOL wasn't in the business of producing content until a few years ago. It used to subcontract that work to companies like iVillage, which sold the ads. Since then, AOL has built not only an in-house content-development team but an advertising sales network. AOL has also upgraded its technology to make it more compatible with the outside world. It has gradually switched from a proprietary programming language, known as Rainman, to the hypertext markup language that powers the Web at large.
And last month chief executive Jonathan Miller reorganized the company, eliminating 700 jobs, to create distinct access and audiences units: The former will focus on retaining subscribers while the latter tries to grow the audience through free programming.