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The Honolulu Advertiser
Posted on: Sunday, August 25, 2002

AOL seeks turnaround by going back to the basics

By Frank Ahrens
Washington Post

Everyone at America Online Inc.'s Dulles, Va., campus knows what the future is riding on. The photocopied black-and-white posters dotting the cubicle farm remind them every day.

"We Can Do It!" the posters read, depicting Rosie the Riveter, World War II heroine. "But we need your help. Download 8.0 today. Do it for our members."

The posters urge staffers to download test versions of the most recent upgrade of AOL's service, due out in October, to help debug it. But the posters look more like fliers for a garage band than something touting a critical product for the nation's No. 1 online service, owned by the world's largest media company.

Battered by slowing subscription growth and diving advertising revenue, rocked by twin federal investigations into its accounting, numbed by executive turnover that's seen four chiefs in the past four months, and blamed for the stock slide of its parent company, America Online says it is returning to its underdog roots for a much-needed turnaround.

The company is betting on subscribers embracing the newest upgrade of its service, version 8.0. It is hoped that this version, which promises to be richer in content and flashy features and more heavily marketed than past versions, will attract new subscribers.

"I believe we are back to the fundamentals," AOL Vice Chairman Ted Leonsis said last week at Dulles headquarters.

Such upgrades once proved to be a bonanza for the company in the days when many people needed AOL to log on to and navigate the Internet. But with so many other ways to get online, AOL's future is now pegged to its ability to capitalize on high-speed Internet access, which makes it easier to watch video and listen to music. The problem is, more than 25 million of AOL's subscribers access the service via slower telephone dial-up service, and most of the high-speed networks are run by competing cable and telephone companies.

AOL has been trying to negotiate access to those networks, and last week it declared it had made some progress. Comcast Corp., the nation's largest cable company, agreed to let AOL offer its service over Comcast's Internet network within the next two years as part of a deal to buy out AT&T Corp.'s minority stake in a Time Warner partnership. AT&T's cable unit is preparing to merge with Comcast.

Analysts regard the Comcast deal as a potential boon — assuming AOL's music, movies and other fare give people a reason to sign up.

"It doesn't change the fact that consumers no longer need AOL to connect to the Internet," said Jordan Rohan, a media analyst for SoundView Technology Group in Old Greenwich, Conn.

AOL's latest plans come after a rough year. The unit has labored to hit unrealistically high revenue targets set by its parent company, crafting some advertising and commerce deals that are now the subject of investigations by the Securities and Exchange Commission and the Justice Department. Sources inside the company say the pressure to make numbers has hurt morale and left employees with a lack of direction, as the "synergy" that was supposed to come from blending the online culture with Time Warner's magazines, music and movies failed to materialize. The stock of AOL Time Warner, the parent company, has dropped 55 percent this year.

Now, with the early-August appointment of media veteran Jonathan Miller to run AOL, there's a feeling among employees that the fever has broken: They're still a little wobbly, but the hope is that the worst is behind them.

AOL believes its opportunity to win back the public comes with version 8.0.

AOL regularly releases new versions of the software used to access its service. Typically, they include minor improvements. Version 7.0, released last year, was considered a yawner by the industry and, in retrospect, misguided by some AOL executives.

"The last two (versions) of our product have been incremental improvements," Leonsis said. "But they were more about commerce and content partners. You start to feel like you've lost your North Star a little bit. They were more for advertisers" than for subscribers.

Version 8.0 will include a number of new features, including automatic redial for when people are cut off from their dial-up connections. An inability to connect with the service or being cut off while on AOL is the No. 1 reason for subscriber cancellations, Leonsis said.

There's a new mantra on the Dulles campus these days: Yes, things have been bad. Yes, we sold our soul to advertisers. But now we realize it. Wait until you see 8.0. Wait until we get all those subscribers onto Comcast's high-speed Internet network.

A year ago, Leonsis was unhappy in his work. America Online employee No. 66, he'd been there since 1994. Now, as vice chairman, he felt the company had slipped off track, becoming too obsessed with advertising deals at the expense of its 34 million subscribers.

Leonsis had just seen a movie called "Space Cowboys" in which geriatric astronauts are called back to NASA to man a space shuttle mission. Leonsis went to Steve Case, AOL Time Warner's chairman and the founder of AOL, and said: "We need some space cowboys back here. Because we not only flew the rocket, we built it. And when you build the rocket, you have an intrinsic understanding of what makes it work."

Case told Leonsis he was not happy with the way things were going, either.

Leonsis' unhappiness may have been caused in part by proximity. His small office at AOL's Dulles headquarters is next door to the office of David Colburn, former head of the company's business affairs unit, whose unorthodox advertising deals spurred the federal probes. Colburn was forced out earlier this month and his office is closed.

America Online cannot afford for 8.0 to be a yawner. The company says it signed up 500,000 new subscribers in the past quarter, but that's down from the 1.3 million new subscribers it signed up in the second quarter of last year.

James de Castro — a radio-industry veteran hired in April to run AOL's Interactive Services and put some sizzle back in the product — says revenue will come, but in different ways than in the past.

De Castro is creating formatted radio stations for versions beyond AOL 8.0, such as an oldies station that subscribers could listen to while using AOL. Thanks to the company's substantial subscriber base — which exceeds by 20 million the audience reached by a nationally syndicated radio star such as Rush Limbaugh — de Castro said he believes he can sell a minimum of ads on the radio stations and still reap sizable profits. Selling only four ads per hour on one station, he said, projects to $131 million in annual revenue.