What’s the future for AOL?

Amazingly, some 26 million US households get their Internet access from AOL. That collection of customers generates roughly $18.13/month/customer or about $ 470 million each and every month or $5.6 billion every year. That’s a very big business — and it doesn’t include the advertising and commerce businesses that also make up AOL. That business makes up another $5.40/month/customer for a total of another $1.7 billion every year. Pays for a lot of lawyers and business development types, doesn’t it?

So, what are the threats to AOL? Obviously, the accounting gymnastics done by the company in earlier years are a threat — and they’re coming home to roost. Every day there’s another story about some aspect of AOL’s past. But let’s assume all of that gets sorted out. What are the real competitive threats to AOL?

Most of the folks who are AOL subscribers are basically buying dial-up Internet access and email. As broadband Internet (DSL, Cable) rolls out (I know, it’s taking much longer than expected), every one of those new broadband customers is likely to be a subscription cancellation for AOL.

That is unless you feel you have to hang on to an AOL email account. Even then, you can convert to AOL’s “bring your own access” pricing plan and save about $10 every month leaving AOL with about $15 per month out of your pocket.

AOL’s been trying to get into broadband with its various cable deals — but they seem pretty fouled up at this point as well. If they aren’t able to convert a dial-up subscriber at $24 per month to a broadband subscriber at $50 per month, they’re in trouble — at least for the access portion of their revenues.

New subscribers are another source of replacement revenue — replacing those that convert to broadband and leave. But as the market begins to get more saturated, the cost per new customer acquired steadily increases and yields decline. AOL’s marketing spend per new customer added this year is $600. That’s projected to grow to $1,500 per new customer added in 2003.

AOL’s user interface and feature set has been stagnant now for a couple of years. How many times can you tolerate “You’ve got mail!” on the TV ads showing the same old UI? No particular incentive there for new customers to go running to AOL. Even if the new 8.0 client software is the best thing since sliced bread will it really matter to folks who are basically just paying for email and the ability to run their browser on a dial-up line?

So, what is the future for AOL? Time Warner thought it was in cross-sell apparently. Wall Street now realizes that was folly as Bob Pittman exits the scene. Jonathan Miller now gets to figure it all out.

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