|AOL CEO Jon Miller gave a thumbs up as he arrived at the Sheraton New York for today's meeting.
In a much-anticipated appearance before more than 500 analysts and reporters at the Sheraton New York Hotel and Towers in Manhattan, executives from parent AOL Time Warner presented their plan to shore up the sagging fortunes of the AOL division, the world's largest online service.
2003 Ebitda to decline 25%
AOL's new chairman-CEO, Jonathan Miller, told a packed ballroom that his division would meet its previously announced revenue predictions for this year even as he painted a bleaker picture for next year. He characterized 2003 as the year that would be the bottom for the beleagured advertising business and predicted that AOL's earnings before interest, taxes, depreciation and amortization -- or Ebitda, a measure of operating results before deducting those expenses -- would decline as much as 25% in 2003.
That figure represents about a $500 million reduction in Ebitda, which Mr. Miller attributed to the expiration of prior advertising deals. Total ad revenue for AOL would decline by 40% to 50% in 2003, he projected. The AOL division generates $1 billion in free cash flow per year, and Mr. Miller projected it would be the same in 2003.
AOL Time Warner closed today at $14.21, down 14% to its lowest point since October.
Acknowledging that AOL's advertising model doesn't work, Mr. Miller said the company is "getting back to basics" with traditional advertisers and trying to repair relationships with marketers and agencies. He offered no details on how that was being accomplished. He said the company planned to use paid search functions, Yellow Pages, classifieds, local guides and other paid listing services to help increase advertising revenue.
Mr. Miller indicated that broadband would be the new mantra for much of the company's future operations. Rather than depend its own high-speed access capabilities, Mr. Miller said AOL would nationally promote a "Bring You Own Access" concept in 2003. It will encourage online subscribers to use the high-speed access accounts of other services, such as Earthlink, to gain entry to AOL broadband programming. AOL will charge $14.95 a month for the new "BYOA" access.
"It's clear that the U.S. online business is increasingly moving to broadband," said Jessica Reif Cohen, Merrill Lynch analyst, but the long-term growth rate is the big unanswered question." She pointed out that Mr. Miller did not discuss the long-term growth potential for the AOL division.
The division's new aggressive broadband stance represents a major shift from its previous promotion of dial-up access as its main product. As recently as earlier this year, AOL executives steadfastly said their primary focus for the foreseeable future was on narrowband, otherwise known as dial-up service.
An existing broadband package -- for $54.95 a month -- had few takers. Only about 500,000 of AOL's 35 million subscribers signed up for the service.
However, Mr. Miller emphasized that dial-up access would remain a pillar of the company's services and revenues. "We don't pretend to have all the answers, " he said. "But I am confident that narrowband is not going away." Indeed, AOL's narrowband business has been a cash cow for the company and the $23.90-a-month service will continue to account for the lion's share of its profit margins.
AOL executives conceded that the $14.95 broadband service will generate much lower margins but said they hope to offset that with growth in premium for-pay content services. As broadband household penetration grows -- AOL projects 25 million broadband households by year end 2003 -- the company hopes it will ultimately benefit, Mr. Miller said.
Premium for-pay content
Mr. Miller said AOL would work with its sibling companies within AOL Time Warner to develop the original programming for the premium paid-content service. He said it would be similar to a cable TV model of tiered packages of exclusive, paid content in areas including gaming, youth, personal financial, music and shopping.
Mr. Miller said the new alliances will include sibling companies
- CNN, which will provide streams of text, video and audio news to AOL broadband subscribers for $5.00 a month. This includes on-air promotion and tie-ins.
- Time Inc. magazines such as Entertainment Weekly, People, InStyle, Parenting, Real Simple and others, which will create content that will be offered through AOL on an access-restricted basis.
- Warner Music Group, which will offer various formats of downloadable music, including 99-cent digital single tracks. Included will be exclusive "first listens" of soon-to-be-released works.
- Warner Bros.' New Line Cinema, HBO and WB Cable Network, which will provide a "first look" service of clips, photos, interviews and other features related to new movie and TV releases. The first HBO project will involve an original comedy distributed throughout AOL broadband.
One surprise was that AOL would no longer pursue launching an eBay-style auctions hub, despite widespread speculation to the contrary. Instead, AOL will launch a "Liquidation Marketplace," in which retailers will be able to offer discounted products at the end of their life cycle. The discounted merchandise will only be available to AOL members in a fixed-price online marketplace. Mr. Miller said revenues from this would be generated by commissions paid by the sellers.
In another move, AOL will abandon its AOL Shop Direct e-commerce service, which was primarily executed through the pop-up ads, which have been banned by the company.
However, Mr. Miller said AOL's overall online transactional services would be broadened. Aside from the planned Liquidation Marketplace, he said online commerce would include "contextual commerce," which would allow subscribers to directly purchase the items they are reading about, classified ads and various kinds of subscription and lead generation fees.