AOL Freebies Won't Guarantee Success

As AOL tears down the few remaining walls that once enclosed its proprietary online service, some question whether it will be able to thrive as a business driven mostly by online advertising.

With the blessing of parent company Time Warner's board and top executives, AOL announced on Wednesday that virtually all of the remaining content and services reserved for paying subscribers will be free.

AOL had already made freely available a large set of fee-based content and services last year when it relaunched its AOL.com portal as part of its strategy to focus its business on online advertising and away from subscription revenue.

Now, subscribers essentially will be paying only for a dial-up connection and a few other perks. Most AOL content, software and services are now free to anyone with an Internet connection at AOL.com and other AOL Web sites.

With this move, AOL expects to keep current subscribers using the AOL network after they cancel their dial-up service and sign up with a broadband provider. It also hopes to lower operating costs significantly and attract new users for its Web sites, services, and software.

Analysts Are Skeptical

But some industry observers aren't sure AOL's metamorphoses will yield the desired results. They say that the freebie strategy can only take AOL so far, and that to truly compete against Yahoo, Microsoft's MSN, and Google for online ad dollars, AOL will have to invest in research and development and continuously churn out new services and enhance existing ones to keep users coming back.

"AOL has historically partnered with others, rather than focused on in-house development," said analyst Greg Sterling from Sterling Market Intelligence. "That may be an area that really challenges AOL."

Meanwhile, Gartner analyst Allen Weiner said there may be fallout from AOL's decision to put a minimum of attention on its Internet access business, while continuing to offer it. "That's a terrible message. By providing the service in that manner, you run the risk of alienating people, and that can hurt your brand," he said. "I'm curious as to what level of service they'll maintain [for the dial-up business.] That's a big concern for me."

Time Warner Chairman and Chief Executive Officer Dick Parsons, Time Warner President and Chief Operating Officer Jeff Bewkes, and AOL Chairman and CEO Jonathan Miller spent hours trumpeting the announcement on Wednesday. "I'm very confident of the strategy and our ability to executive it," Miller said during a conference call with analysts and press.

But despite the loud display of support from top-level executives for the announcement, nothing can erase the truth that the plan is reactive and years overdue, Weiner said. "I'm puzzled as to how AOL didn't see this coming five years ago," he said.