Investors worry AOL stalled as parade passes by

By Saul Hansell

New York Times News Service

Everything that the critics said about America Online turned out to be true -- years later.

Despite the challenges, AOL surfed on the crest of the Internet wave, attracting 25 million paying subscribers in the United States and 8 million more overseas. It has $10 billion in annual revenue and more than $2 billion in pretax operating profit.

Now, though, AOL is wobbling. Its subscriber growth is slowing and its advertising revenue is falling. And reinforcing investor fears, last week the company returned Robert W. Pittman, the relentless salesman who oversaw America Online during its most profitable run in the late '90s and who has been the co-chief operating officer of AOL Time Warner, to run AOL.


Investors took Pittman's return as confirmation of their worst fears about the America Online division, and AOL Time Warner's shares fell last week to a low of $19.60 on Thursday.

Investors are most worried that technology and the market are passing AOL by. It remains the undisputed king of dial-up Internet access over phone-line modems, called narrowband. But it does not seem to have yet mastered the next generation of high-speed, or broadband, service, which has been dominated by cable systems and phone companies.

Holly Becker, the Lehman Brothers analyst, laid out this dark vision in a recent report that downgraded AOL Time Warner's stock to neutral, from buy. This year, she estimated, America Online will add 2.7 million net new subscribers in the United States, bringing the total to 27.9 million and representing a growth rate of 11 percent. But that growth would be a significant decline from last year.

And while America Online's broadband service is growing quickly, but it is still tiny.

Even worse, Becker calculated, despite AOL's $2-a-month price increase last summer for its most popular unlimited use plan, actual monthly revenue per subscriber barely budged. The reason is that AOL has increased the use of free trials and various discount plans offered to new computer buyers and through corporations.

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