America Online Signs Up 30 Millionth User

An increase of 1 million subscribers in the past two months -- despite a pending rate increase -- may indicate the ISP is 'relatively price inelastic.'
By George Mannes ,

Neither snow nor rain nor heat nor the first rate increase in three years appear to get in the way of

America Online's

subscriber growth.

The

AOL Time Warner

(AOL)

unit said Monday that it had reached the round-number landmark of 30 million subscribers worldwide, adding 1 million users in the past two months. The milestone suggests AOL is adding subscribers faster than analysts have expected and isn't suffering from its

disclosure last month that it was raising rates in July.

But investors weren't cheered by the news Monday; AOL's shares ended regular trading down 10 cents to an even $53.

AOL's latest subscriber count -- up from 28.8 million at the end of the first quarter and 29 million on April 16 -- means AOL is on track to add 1.3 million subscribers in the second quarter, says

Merrill Lynch

analyst

Henry Blodget, ahead of his estimate of 1.06 million. (Merrill has a buy on AOL Time Warner; the firm was an underwriter of a debt offering for the former

Time Warner

.) In fact, it appears that AOL is adding subscribers faster than it was adding them last year at this time, says Blodget: 14,500 net new subscribers per day this quarter, up from 10,500 a day in 2000.

That means people apparently haven't been turned off by the May announcement that AOL was raising its monthly fee for unlimited usage to $23.90 from $21.95, says Blodget. But he cautioned that to get a clearer picture of the rate increase's impact, investors will have to wait until AOL breaks down subscriber additions between domestic and international users when it reports financial results for the second quarter. Blodget also points out that the increase has two other chances to have a negative impact on subscriber growth: on July 1, when it actually goes into effect, and in August, when subscribers start seeing the new rate on their credit card statements.

SG Cowen

, which rates AOL a strong buy, says the subscriber growth demonstrates that the AOL service is "relatively price inelastic" and that the market currently lacks a viable alternative to AOL's service. AOL's service is one of the fastest-growing parts of AOL Time Warner and one of the conglomerate's most significant drivers of earnings before interest, taxes, depreciation and amortization, according to SG Cowen. (The firm has been an underwriter for AOL.)

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