Lawyers Licking Chops Over AOL Sub Flub

Allegations that AOL Time Warner AOL may have inflated subscriber counts at its America Online unit could have courtroom repercussions.

On Friday, investors mostly shrugged off a story in The Wall Street Journal suggesting that from 2000 to 2003, AOL unnaturally boosted subscriber counts. Such a tale, if true, isn't much of a shock for AOL-watchers, given the company's already well-documented pushing of envelopes in advertising revenue recognition.

Nor does the story introduce new worries about the quality of AOL's subscriber count. Even the company's supporters on Wall Street expect it to lose millions of subscribers over the next half-decade as cut-rate dial-up services and migration to high-speed Internet connections eat away at AOL's subscriber base, which amounted to 25.3 million members at the end of June.

But what the story does appear to do is add one more trump card to the hand of all the plaintiffs lined up to collect damages from AOL Time Warner in shareholder suits. Since investors have been following AOL's subscriber counts closely since the online service first went public, litigious former shareholders could presumably argue that any manipulation of those numbers constitutes fraud. And with AOL shares having plunged since the company's formation through a closely watched 2001 merger, there are plenty of potential complainants out there.

An AOL Time Warner spokesman declined to comment Friday.

AOL Time Warner shareholders couldn't have been pleased with the story, but they didn't appear particularly unnerved, either. The company's shares traded at $15.02 at midday Friday, down 29 cents. Shares have ranged from $8.70 to $17.89 over the past year.

Forget About It

One prominent AOL booster, Merrill Lynch analyst Jessica Reif Cohen, termed the story a "nonevent," saying that the 830,000 bulk-rate subscriptions at issue had been eliminated from subscriber counts by the end of 2002. AOL Time Warner made a passing reference to the bulk-rate program in its annual report for 2001. (Cohen, whose firm has done recent banking and underwriting for AOL Time Warner, upgraded the stock to buy last week, with a 12-month price target of $24.)