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Updated from 12:31 p.m.

As much as America Online has been flailing over the past few years, it's still the most fearsome fish in the pond.

That's what other Internet service providers discovered Tuesday after

The Wall Street Journal

reported that AOL, a unit of the soon-to-be-renamed

AOL Time Warner

(AOL)

, was planning to launch a discount ISP under the Netscape brand.

In response to the news, shares in

United Online

(UNTD)

-- operator of the Juno and NetZero discount ISPs -- fell as much as 21%, while shares in the largest independent ISP,

EarthLink

(ELNK)

, fell 7%. AOL Time Warner shares fell 3 cents to $15.72.

How much AOL's competitors have to fear from AOL is unclear, given AOL's spotty performance in the discount ISP business and the obvious difficulties that discounting causes for the flagship AOL service. "I'm not concerned this is going to cut into our growth," United Online Chairman Mark Goldston told

TheStreet.com

Tuesday. "AOL has been in this market before and not cut into our growth."

But at the very least, the news indicates something that followers of

Microsoft

(MSFT) - Get Free Report

learned long ago: As far as Wall Street is concerned, an announcement that something will happen off in the future can be as hazardous, if not more so, than the actual event. To strike fear in the hearts of investors, sometimes a company needs only to be reportedly launching a new product. Months or years later -- even if the much-vaunted new product is lousy, or even if it never shows up at all -- the damage has already been done.

Sinking

At issue is whether, and how well, AOL will adopt the strategy of, "If somebody's stealing our business, it might as well be us." It's been no secret that over the past year, the nation's largest online service has been losing customers on the high end to broadband providers, mostly cable TV system operators, and on the low end to discounters -- chiefly United Online.

In the 12 months ended June 30, the number of AOL-brand subscribers in the U.S. dropped 1.2 million to 25.3 million. Over the same period, however, United Online's billable subscriber count grew 840,000 to 2.5 million. United Online's Juno and NetZero offer dial-up Internet access either for free or for a price as low as $9.95 a month, while AOL's flagship service goes for $23.90 a month.

By keeping costs low, United Online has succeeded where numerous other discounters have failed. In its fiscal year ended June 30, the company reported $277.3 million in revenue, up from $167.5 million the prior year.

For fiscal 2003, United Online reported a net profit, in line with generally accepted accounting principles, of $27.8 million, or 62 cents per diluted share. The company lost $47.8 million, or $1.35 per share, in the prior year.

Fishing

As daunting as it may be to learn that AOL is targeting your line of business, history indicates that the big fish's success is not guaranteed.

Several years ago -- not to mention several executive changes ago -- AOL touted a multibrand strategy in which its CompuServe service would target no-nonsense business users. Subsequently, CompuServe became AOL's discount brand. But CompuServe's apparent limbo -- the service hasn't gotten more than a passing mention in an AOL Time Warner press release in about a year and a half -- makes one wonder whether the CompuServe brand is simply being targeted at current subscribers who are unable to overcome inertia and shop around.

United Online's Goldston also points out that, for the past two years, AOL has partnered with mass-market retailer

Wal-Mart

(WMT) - Get Free Report

to offer a cut-rate Internet service, Wal-Mart Connect, for $9.94 a month. That service, he says, hasn't hurt United Online at all. "If all they think they need to do is take a well-known brand name and bring it into access -- well, they've tried it with Wal-Mart, and it didn't work."

Putting a full-price brand and a discounter under the same roof raises the perennially thorny question of whether such a discounter -- the proposed Netscape, in this case -- could get the corporate-level backing to compete as vigorously as an independent would, for fear of cannibalizing the higher-profit brand.

It's far from clear how many subscribers AOL will lose before its membership count stabilizes. At a recent investment conference, AOL Time Warner executive Don Logan suggested that the end of the subscription slide was in the not-too-distant future. But at least one Wall Street analyst has speculated that AOL's subscriber count might not bottom out until it hits 15 million.

Ypres

Given the fogginess of the subscriber outlook, it's easy to imagine that in the halls of AOL Time Warner, some will argue that competition as aggressive as what's coming from United Online is inadvisable, and that the company would be served better by some happy-medium brand. Such an argument is the equivalent of a bunch of battlefield surgeons debating the treatment for a wounded patient: Some might argue that the whole arm has to be amputated to save the patient, though others might say that the sacrifice of a hand will suffice.

Goldston, who says that United Online spends in the range of $80 million to $100 million annually on marketing, insists that AOL will have to spend plenty to market the Netscape dial-up service. That raises the question, he says, of whether the online unit will spend additional marketing dollars on the new service, or redirect a portion of the marketing budget that's currently earmarked for the flagship AOL. Neither is a particularly appealing choice for AOL, he says. "If you spend more money against a $9.95 product when your core business is a $23.90 product -- that cannot be a good thing from a financial standpoint."

Also clouding the issue is the uncertain lessons to be drawn from EarthLink's PeoplePC brand. That's the discount ISP that the full-priced EarthLink -- suffering the same high- and low-end defections as AOL -- is operating to get some of the low-end business that it's losing. In the quarter ended June 30, EarthLink said it lost 157,000 full-priced dial-up customers, but gained 78,000 subscribers to PeoplePC, bringing that service's subscriber count to 197,000. Including PeoplePC, the company has 3.9 million narrowband subscribers.

An AOL source indicates it's likely the company will introduce the $9.95 monthly Netscape service early next year.