AOL Price Hike Could Boost Results

Updated from 12:07 p.m. ET

America will be spending a little more to go online.

In a move widely expected by analysts, AOL Time Warner's (AOL - Cramer's Take - Stockpickr) America Online service said Tuesday it would raise its standard monthly fee by $1.95 to $23.90 starting in July.

The 9% increase, the first price hike since the boost to $21.95 from $19.95 three years ago, is one of more prominent financial "dials and levers" that AOL Time Warner executives have been saying they could use to adjust the company's financial performance.

Notably, raising subscription fees isn't an option for many other Internet companies, such as Yahoo! (YHOO - Cramer's Take - Stockpickr), as attractive as it might be in the current weak online advertising market. Yahoo! doesn't charge users.

However, AOL Time Warner has said in recent months that it wouldn't even need such a subscription increase to hit the financial target of $11 billion in 2001 earnings before interest, taxes, depreciation and amortization -- a target that executives first set when the deal to create AOL Time Warner was announced in early 2000.

Regardless of whether the money is necessary to clear that hurdle, the move will likely add $500 million in revenue and EBITDA in its first year, or $125 million per quarter, according to Merrill Lynch analysts Henry Blodget and Jessica Reif Cohen. That said, the analysts aren't changing their estimates for AOL Time Warner, saying they've already factored in a price increase. (Merrill rates AOL Time Warner a buy; the company was an underwriter of a debt offering for the former Time Warner.)

The price hike may slow subscriber growth, but it won't stop it, say analysts. Morgan Stanley analysts Mary Meeker and Rich Bilotti are cutting their subscriber growth estimates for the second and third quarters to a total of 1.3 million from 1.75 million, putting their year-end estimate for AOL's U.S. subscribers at 25.5 million instead of the 25.9 million previously forecast. (Morgan Stanley rates AOL Time Warner a strong buy; the bank advised Time Warner in the merger.)

Perhaps the biggest beneficiaries of AOL's announcement were shareholders of other Internet service providers. By midday, Prodigy Communications (PRGY - Cramer's Take - Stockpickr) was up 22% to $3.05, NetZero (NZRO - Cramer's Take - Stockpickr) had climbed 19% to $1.02 and Juno Online Services (JWEB - Cramer's Take - Stockpickr) was up 27% to $1.81, presumably on the belief that AOL's move either gave them cover for their own price hikes or makes their current low-priced or free offerings more attractive. AOL Time Warner rose 45 cents to $57.05.