Suitors come a callin' for a spruced-up AOL

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From wallflower to belle of the ball: How did America Online-widely seen as a disastrous acquisition for Time Warner-suddenly become a hot property?

The same rivals that have dismissed the portal are now jockeying to buy it-or a piece of it. In the last month, Microsoft's MSN, Yahoo | and a combined entity of Google and cable company Comcast have entered into acquisition talks with AOL.

"AOL was a property that everyone loved to trash," said Greg Smith, exec VP-media insights, planning and analysis at Carat Fusion. "But underneath, it always had that abiding strength. AOL knows how to build audiences."

After years of doling out higher prices, poor service and an incompatible platform technology, AOL has solved those problems, said Jeff Lanctot, VP-media and client services at Avenue A/ Razorfish. "There's some hype-but this is a company that has improved," he said.

The revamped, now free of charge to the world of Web users, is in many ways better positioned than its competitors to satisfy the Internet consumer-and marketer-of the future. The surprise could be that the very attribute that makes AOL a laughingstock-its declining subscriber base-is the asset that might be most valuable to suitors.

Shrinking dial-up

AOL reported it had 20.8 million U.S. subscribers as of the second quarter 2005. That's 2.6 million fewer than the year-ago quarter-and no one denies that those subscribers will certainly cancel and re-up with a broadband provider-eventually. "Dial-up is not going to go to zero in five years, but it's shrinking," said David Card, VP-research director, Jupiter Research.

For Comcast, which only has 7.7 million high-speed Internet subscribers, or Yahoo, which now has deals with broadband providers SBC, Verizon and Bell South, that's good news.

One of those suitors could, for instance, offer subscribers a broadband hookup for $5 more a month than they are paying for dial-up. "Simply by saying AOL now offers broadband through somebody else makes it that much easier, and subscribers could still retain things they don't want to switch, like their e-mail address and their familiarity with the brand," said Jeff Marshall, VP-managing director, Starcom IP.

There's no guarantee an AOL partner would be able to keep those customers, but it's a risk worth taking, he added.

Mr. Lanctot agrees. "If the broadband price point is right, the dial-up customers behavior could change," he said. The dial-up subscriber of today might be a late-adopter to broadband.

There are other reasons AOL is now hot.

In content, that ever-important magnet for attractive ad inventory, the portal is first-rate, analysts and media buyers said. Because was redesigned from the ground up for a broadband-enabled world, every page on the site is retooled to appeal to consumers with fast cables. By contrast, MSN and Yahoo are revamping their pages to suit broadband piecemeal, Mr. Card said. "The editors at AOL know how to program better than anyone else in the universe."

The new increased video streams 120%, "amping up the level of video everywhere you go in programming," Fred McIntyre, VP-video at AOL Media Networks told Advertising Age earlier this year. AOL has partnered for content with siblings Warner Bros Television, HBO and Time Inc. magazines including People and InStyle.

And in the technique of online community, the portal is expert at "mingling the audience voice in with actual content," Mr. Card said, as it sprinkles polls like "What's your favorite spooky show?" throughout the site.

So is the new AOL attracting visitors? In September, 112 million people visited and other AOL properties like Mapquest, according to ComScore Media Metrix. Measurement services do not measure which visitors are AOL subscribers and which are not.

While AOL's $320 million second-quarter ad revenue doesn't reach Yahoo's $759 million or Google's $2.07 billion for that quarter, it isn't the performance of an also-ran, either. The recent figure reflects a 45% growth for ad revenue over the second-quarter 2004, offering untapped potential for a buyer.

Meanwhile, AOL is, and continues to be, a must-buy for online media plans. Why? Mass audience. "The audience is mainstream America," Mr. Marshall said. "They may still be on dial-up, but they are consuming things, they shop a lot and do as much e-mail and IM as anyone else."

Not to mention it's a subscriber base with a profitable and consistent revenue stream as long as it lasts. "Twenty million people paying at least $15 each," said Mr. Marshall. "That's a lot of revenue."

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