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America Online revealed a key part of its turnaround strategy on Tuesday: Be more like




As part of the online service's effort to improve flagging finances and find new ways to appeal to users, AOL will build on its basic offering of content and features by introducing a series of premium services, AOL Vice Chairman Ted Leonsis told a group of financial analysts.

Separately, AOL announced a major change in its tactics for addressing the migration toward high-speed Internet access in the U.S., saying it would start marketing AOL as a destination for people who get broadband connections from other providers, rather than simply try to get people to sign up for AOL-branded cable connections.

Although Leonsis compared the premium services strategy to that of a cable TV operator selling premium tiers on top of a basic offering, the strategy is reminiscent of that of Internet rival Yahoo!, which has spent the past year developing for-pay services to supplement its weak postbubble advertising business. The supplemental consumer revenue strategy channel thus makes a lot of sense for AOL, which announced Tuesday morning that advertising and commerce revenue, which already fell short of expectations this year,

would decline precipitously in 2003.

Battered by the 2003 forecast, shares in AOL parent

AOL Time Warner

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dropped $1.76, or 11%, to trade at $14.81 on Tuesday morning. The stock's decline set off a broad retreat in technology stocks, reversing the sector's recent uptrend.

Steep Climb

Pointing out the competition AOL faces for subscribers, Leonsis showed analysts a list of the top reasons why members leave the service -- the first time, he said, the company had revealed these reasons in order of performance. The most common reason, he said, was "price/value," another way of saying consumers thought AOL was too expensive compared to the service people could get from other customers.

To address that complaint, AOL is developing a number of ways to distinguish its service, such as the program, announced Tuesday, of offering a CNN video news service to members for free rather than the $4.95-a-month fee already charged to Internet users.

Clearly, AOL has much work ahead of it if the premium services are to make a significant contribution to its bottom line. The precursor of the premium strategy is apparently the 2-year-old AOL By Phone, which enables members to access news, email and other services by calling a toll-free number at AOL. The company has 125,000 paying customers for the service, Leonsis said Tuesday. At the list price of $4.95 a month, that translates into about $7.5 million in revenue per year -- no small amount, but hardly enough to fill the holes in the company's advertising sales business.

Indeed, for its part, Yahoo! seems to have a jump on AOL, as far as turnarounds go. Though the $950 million in revenue that analysts expect Yahoo! to report for the year is below its peak 2000 revenue of $1.1 billion, it represents a bounceback from 2001 revenue of $717 million. AOL, by contrast, says 2003 will be the year that its advertising revenue bottoms out.

AOL appears to have had quicker growth with a more recently introduced service that alerts dial-up AOL customers if they have an incoming phone call. That $3.95-a-month service has 100,000 paying customers, Leonsis said.

Next spring, AOL says it will introduce an integrated mail service that will enable members to access their voice mail and email either through the AOL service or via their home telephone number.


Separately, Lisa Hook, president of AOL Broadband, said the company would stop focusing on attempts to cut deals with cable operators and other broadband providers under which consumers buy access from those providers branded as an AOL Internet connection. Instead, the company will spend next year marketing AOL "bring-your-own-access" nationwide, priced at $14.95 a month. (Currently, the AOL dial-up service is priced at $23.90, while AOL-branded broadband is priced at $54.95.)

AOL, an organization not known for its modest demeanor, took on a contrite tone in its presentations to Wall Street on Tuesday. The service is launching a new effort to solicit criticisms from users, Leonsis said. "We are listening more to our members," he said. "We are a humbled company."

AOL Chairman Jon Miller, brought in earlier this year as part of the turnaround effort, called the biggest risk to the company's strategy "executional."