AOL faces tough times

Copyright 2002 Knight Ridder/Tribune Business News
Copyright 2002 Daily News (NY)
Daily News (NY)...10/10/2002
From LexisNexis

Phyllis Furman

AOL Time Warner Inc.'s woes keep adding up.

The floundering media giant that's seen ads evaporate from its American Online division, could now face a steep decline in profits from its 35 million AOL subscribers, according to a report issued yesterday.

Profits from AOL subscriptions could fall 72 percent to $235 million over the next two years as AOL's customers switch from dial-up Internet connections to broadband service, or AOL offered over high-speed connections, said Merrill Lynch media analyst Jessica Reif.

"Our concern is that as AOL advertising hits bottom and begins to recover, AOL's subscription revenues may be hitting a peak of their own," Reif said.

Converting subscribers to broadband service could hurt AOL in two ways. The company will face fierce price pressure from rivals, and it will also be forced to pay cable companies steep fees to gain access to their systems.

"You have to assume the cable guys will take a big chunk," said Tom Wolzien, media analyst at Sanford Bernstein.

With the subscription business threatened, the pressure is on AOL to develop premium services, such as a music subscription service, that would command higher fees from customers, Reif said.

The warning about AOL's subscribers is the latest in a nonstop flood of bad news for AOL Time Warner.

Dragged down by its lumbering AOL division, the media giant's stock has sunk and its chairman, Steve Case, is on the ropes. The company also is the subject of a Justice Department probe into AOL's accounting practices.